Question 1

Suppose that the (inverse) demand equation is given by P = 40 - 2Q while the supply

equation is given by P = 4 + Q. Prices are measured in dollar ($).

a) Calculate the equilibrium price and quantity and the price elasticity of demand at

equilibrium.

b) Calculate consumer surplus, producer surplus and total surplus at equilibrium.

c) Suppose the government imposes a tax of $2 per unit of output on sellers. Derive

the new supply curve and calculate the new equilibrium price and quantity as well as

the deadweight loss due to the tax.

Please answer with evidence (including graph)