Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 11

Trans-fatty potato chips are competitively supplied. The supply curve is Demand for these potato chips is Q D = 100 - 2P.
a. Compute the equilibrium price, quantity, consumer surplus, producer surplus, and social welfare.
b. Suppose that consumers make irrational decisions either because of cognitive or willpower limitations, leading them to buy too many bags of potato chips. Although their true demand if they made rational decisions is as given already, their perceived or ''mistaken'' demand is Q D = 200 - 2P. Compute the equilibrium price and quantity now. Demonstrate the deadweight loss triangle on a diagram of the market and compute the deadweight loss.
c. What per-unit tax could the government impose to correct this deadweight loss problem?
d. Suppose instead the government made a mistake and the second demand is actually the true demand stemming from rational decisions. What deadweight loss has the government introduced with the tax?