Asked by Amanda Palazzo on Jul 26, 2024
Verified
The market demand and supply functions for VCR movie rentals are: 
and 
Calculate the equilibrium quantity and price and point elasticity of demand in equilibrium. Next, calculate producer surplus. Suppose that VCR movie rentals are taxed at $0.25 per unit. Calculate the revenues generated by the tax. Calculate the loss in producer surplus. What percentage of the burden of the tax falls on producers?
Tax Revenues
The funds collected by governments through the process of levying taxes.
Point Elasticity
A measure of how responsive the quantity demanded or supplied of a good is to a change in its price, calculated at a particular point on the demand or supply curve.
Producer Surplus
The profit producers make over and above the minimum amount they would be willing to accept for selling their goods or services.
- Understand the concept of market equilibrium and how it is determined in various markets.
- Calculate equilibrium price and quantity for different goods and services.
- Analyze the impact of taxes on market equilibrium, including changes in consumer and producer surplus.
Verified Answer
OM
Olivia MerrittJul 29, 2024
Final Answer :
First we must determine the market equilibrium quantity and price. To do this, we set quantity demanded equal to quantity supplied and solve for equilibrium price.QD = 10 - 0.04P = QS = 3.8P + 4
Then P = 1.56, and at this price we have Q = 9.94.
The point elasticity of supply is
The producer surplus is 
If the market is taxed $0.25 per unit, the equilibrium price consumers pay is:
QD = 10 - 0.04 Pb = Qs = 3.8(Pb - 0.25) + 4
Then Pb = 1.81. The quantity exchanged is 9.93. The new level of producer surplus is:
PS' = 4(1.5599) + 0.5(9.93 - 4)(1.5599) = 10.86.
The loss in producer surplus associated with the tax is $0.01. The tax generates tax revenues of $2.48. Thus, producers bear less than 1% of the burden of the tax.
Then P = 1.56, and at this price we have Q = 9.94.
The point elasticity of supply is
The producer surplus is If the market is taxed $0.25 per unit, the equilibrium price consumers pay is:QD = 10 - 0.04 Pb = Qs = 3.8(Pb - 0.25) + 4
Then Pb = 1.81. The quantity exchanged is 9.93. The new level of producer surplus is:
PS' = 4(1.5599) + 0.5(9.93 - 4)(1.5599) = 10.86.
The loss in producer surplus associated with the tax is $0.01. The tax generates tax revenues of $2.48. Thus, producers bear less than 1% of the burden of the tax.
Learning Objectives
- Understand the concept of market equilibrium and how it is determined in various markets.
- Calculate equilibrium price and quantity for different goods and services.
- Analyze the impact of taxes on market equilibrium, including changes in consumer and producer surplus.