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AP Microeconomics Name: _______________________ Practice Free Response Market for T-Shirts Assume the market for T-shirts is in equilibrium at a price of $16 dollars. 1. Calculate the elasticity of demand from $16 to $22 dollars using the mid-point method 2. We know that the price elasticity of demand at a price of $8 dollars would (greater, less) than your answer in question 1. Explain why…. 3. Calculate the original: a. Consumer surplus 4. 5. ______________________________ b. Producer surplus ______________________________ c. Total Welfare/Surplus ______________________________ d. Deadweight loss ______________________________ Assume the Government places a $14 tax on the sellers of T-shirts a. Modify your graph for the effect of this tax & shade in deadweight loss b. The new price buyers pay is ____________ c. The new price sellers receive is ____________ d. Tax Revenue raised by tax ____________ e. New consumers surplus is _____________________ (calculate #) f. New producer surplus is _____________________ g. Deadweight loss _____________________ h. Total Surplus _____________________ Calculate the tax incidence for the buyer and seller. (calculate #) Explain why one group bears more of the tax…. Cigarettes 1) Estimate the elasticity of demand (Ed) for cigarettes. (is Ed > 1 or Ed < 1) ____________________________ List 2 reasons why: __________________ _________________ 2) Use supply and demand analysis to illustrate impact of a per-unit excise tax on each of the following i) ii) iii) iv) v) The price paid by consumer Pb & Ps received by producers and the new equilibrium quantity The amount of government tax revenue collected The loss in total welfare (DWL) The new producer surplus (PS) & consumer surplus (CS) The formula total welfare after the tax = ________________________________ 3) If the demand for cigarettes becomes more elastic, explain how each of the following will change versus your initial conclusions: i) ii) iii) iv) The price and quantity sold of cigarettes The government tax revenue The burden of the tax on the consumer and the producer The gain or loss in total welfare 4) Now assume that economists determine that cigarette smoking has severe spillover costs. i) Re-draw the first graph with correct labels for the case of spillover costs with a per-unit tax. i) Hint: Use MC and MB instead of S & D labels ii) Does total welfare rise or fall after the tax now?