Microeconomics 2nd Edition by Douglas Bernheim

Exercise 4

Beatriz enjoys writing and uses a large amount of paper. Currently, paper costs $2 for 100 sheets. The formula for her demand curve is S = 525 50 P S , where P S is the price of 100 sheets and S is the number of sheets purchased. The governor of her state has proposed taxing paper at the rate of $0.50 for each 100 sheets. Assume that this policy would increase the price of paper to $2.50 (including tax).
a. Draw Beatriz' demand curve. Using the method described in Section 6.2, compute the change in her consumer surplus for the proposed tax increase.
b. How much revenue will the government raise by taxing Beatriz How does that revenue compare to her economic losses Does the new tax raise enough revenue for the government to compensate her for her loss