Economic theory

Q20-Q24. The market for cheap beer is characterized by the following supply and demand curves:
S: q = p + 3
D: q = −2p + 24
Suppose the government puts a $3 tax on cheap beer. 20. Before the tax, what are the initial equilibrium price and quantity in the cheap beer market?

  1. Using the point elasticity formula, calculate the price elasticities of supply and demand at the initial equilibrium.
  2. From the elasticities you calculated, do you expect the incidence of the tax to fall more heavily on the consumers or the producers? Explain.
  3. Calculate the effects of the tax on: (i) the price faced by consumers, (ii) the price received by producers, and (iii) the quantity traded in the market.
  4. Draw a graph showing the initial equilibrium and illustrating the impact of the tax. Label all curves and axes and all relevant prices and quantities. Identify in your graph the deadweight loss and the revenue raised for the government.

Sample Solution