Question: A village has only one consumer, whose demand for a good is D1(p) = 15 p. The market supply for the good is S(p) =

A village has only one consumer, whose demand for a good is D1(p) = 15 p.

The market supply for the good is S(p) = 2p.

(a) What are the equilibrium price and quantities in the market?

Explain how you found them and provide a graph representing them. Be precise in your drawing.

(b) Suppose the government introduces a per unit tax t = 3 on the good. What is the new equilibrium price and quantity? Does your answer depend on whether the tax is imposed on the consumer or on the producers? Explain.

(c) Suppose the government decides to intervene in the market and fixes the price of the good to p = 3 (there is no tax now).

What is the effect of the intervention? Draw a graph representing it and describe the changes in consumer's surplus and producers' surplus. Compute the deadweight loss.

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