Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,” you must show how you arrived at your final answer.


Assume the market for good Y is in equilibrium.

(a) Draw a correctly labeled demand and supply graph for good Y. Label the equilibrium price
P
e
and the equilibrium quantity
Q
e
.

(b) Assume the government imposes a per-unit tax on good Y. On your graph in part (a), show each of the following after the tax has been implemented.

(i) The equilibrium price labeled
P
N
and the equilibrium quantity labeled
Q
N

(ii) The area representing the change in consumer surplus, shaded completely

(c) Will the price paid by consumers increase by the same amount as the tax? Explain.

(d) Will the loss in consumer and producer surplus be greater than, less than, or equal to the tax revenue collected by the government? Explain.