1. Ed = 8.3 (using mid-point method)
Practice Free Response Solved
Ed = 8.3 (using mid-point method)
%∆ Qty D / % ∆ Price
Qty D = (40 - 0)/ =
Price = [($28- 22)/$25] =
2/.24= 8.3
2) Less Elastic, as you move downward along Demand curve (towards x-axis) demand becomes less elastic. That is Ed becomes a smaller number
Know this:
- Mid-point of all linear demand
curves is UNIT ELASTIC.
- Bottom part is inelastic range
- Top part is elastic range
$25 20

2. 480 consumer surplus 640 producer surplus 1120 total welfare
Practice Free Response Handout Solved
3) Calculate Original:
480 consumer surplus
640 producer surplus
1120 total welfare
Zero loss of welfare
4) Tax of $14 on sellers
Modify….
22 buyers pay
8 seller receive
560 tax revenue
120 new c.s.
160 new p.s.
280 deadweight loss
840 total surplus
5) Sellers--more inelastic curve has Higher tax incidence
Buyers pay $6 of tax
Sellers pay $8 of tax S2
$14 Tax on sellers CS
TAX
REVENUE
Deadweight
loss PS
You shift the supply curve because the tax was on sellers-but draw the wedge first!

3. buyer pays more Sellers receive less Qty sold falls
6) Ed < 1 (inelastic)
No good subs, necessity
7) See graph
buyer pays more Sellers receive less
Qty sold falls
ii) – iv) labeled on graph
v) CS + PS + Tax Revenue
8) See below:
Qty falls more, Sellers pay more, buyers pay less
ii) Less Gov’t revenue
Shared more equally
(buyer paid most of tax before)
Bigger DWL
(quantity shrinks more)
Cigarettes
Tax Revenue CS PB
TAX
REVENUE
Deadweight
Loss P1 E1 PS PS 4) Q2 Q1
Notice buyers pay most of tax & DWL is
small because of inelastic demand!

4. 9) Spillover Costs of Smoking
Tax suppliers the exact size of the spillover cost (external cost)
Total Welfare would rise even though the market Shrinks
Both external &
internal costs!

5. Basic Tax Example & DWL

6. Price Ceiling & DWL

7. Subsidy & DWL
                                                                       (

8. Subsidy & DWL
                                                                       ( .