The government is interested in taxing sugar in order to increase its tax revenue. The market is currently at equilibrium at a price of Ksh. 10 per kg and sales of 1000 kgs per month. Suppose that own price elasticity of demand at the equilibrium point is 0.1 and the own price elasticity of supply at this point is 0.2. The government announces that the tax measure with the new market price to be maintained at Ksh 15 per kg.

Required

(a)Compute and show the suppliers and buyers tax burden.

(b)How much will the government get from the new tax measure?

(c)Calculate the deadweight loss of the tax (excess burden of the tax).

2.

The demand curve and total cost curve for a firm are as follows

Q = 200 – 2P

C = 10Q + 0.25Q2

Derive the price and output effects under Perfect competition and under monopoly:

(i)When a sh 5 is imposed as tax

(ii)When advalorem tax of 10% of the price is imposed.

3.

2. You are given the following information about the market for motorcycles.

Market Demand: P = 400 – 4Q

Market Supply: P = 4Q

a. (2 points) Find the equilibrium price and quantity in this market.

b. (2 points) What is the value of consumer surplus in this market?

c. (2 points) What is the value of producer surplus in this market?

d. (2 points) Suppose that the government decides to impose an excise tax of $80 per motorcycle on producers in this market. What will be the number of motorcycles sold in this market once this tax is imposed?

e. (3 points) Given the tax described in part (d), what will be the tax incidence on consumers?

f. (3 points) Given the tax described in part (d), what is the value of the deadweight loss from the tax?

g. (3 points) What is the loss in producer surplus from the imposition of the excise tax described in part (d)?

h. (3 points) Suppose the government would like motorcycle consumption to fall to 20 units. Relative to the initial situation before there was any excise tax, how big an excise tax would the government need to place on motorcycles in order for consumption to fall to 20 units?