1. There is a market for beef where Home demand and Home supply are
QD(p) = 40 – p and QS(p) = p,
with p representing the price of 1 kg of beef (“won” is the unit of money). Given
the above demand and supply for this market, answer the following questions
a) Calculate the consumer surplus, the producer surplus, and total surplus in the
market equilibrium
b) Home government is considering an excise (per unit) tax of t on Home
consumers of beef. Derive the total surplus, the deadweight loss, and tax revenue
as a function of this excise tax t.
c) Calculate the tax that maximizes total surplus and the tax that maximizes revenue.
d) Instead of imposing an excise tax on consumers of beef, Home government is
considering an excise tax of tp on Home producers of beef. Derive the consumer
surplus, producer surplus and tax revenue as a function of this excise tax tp.
2. Now consider the possibility of international trade of beef between Home country
and Foreign country where Home demand and supply are given as in Question 1
and Foreign demand and supply are
Q
*
D(p
*
) = 40 – p
*
and Q
*
S(p
*
) = 2p
*
,
with p
*
representing the price of 1 kg of beef (“won” is the unit of money) in
Foreign country. Given the above demand and supply for Home and Foreign
countries, answer the following questions

a) Calculate Home consumer surplus, Home producer surplus, and Home total
surplus under free trade of beef between Home country and Foreign country
(which implies p = p
*
). Does Home country gain from trade? Explain your
answer (if “gain,” explain where the gain comes from and if “loss,” explain
where the loss comes from).
b) Home government is considering an excise (per unit) tax of t on Home
consumers of beef. Derive Home total surplus as a function of this excise tax t.
c) Calculate the tax that maximizes Home total surplus. Explain the sign of tax that
maximizes Home total surplus (if “zero,” why it is zero, if “positive, why it is
positive, and if “negative” why it is negative).

1.
(a) Consumer surplus =
Producer surplus =
Total surplus =
Derivation)

(b) Total Surplus (t) =
Deadweight Loss (t) =
Tax Revenue (t) =
Derivation)
(c) Total surplus maximizing tax =
Tax revenue maximizing tax =
Derivation)
(d) Consumer Surplus (tp) =
Producer Surplus (tp) =
Tax Revenue (tp) =
Derivation)
2.
a) Home consumer surplus =
Home producer surplus =
Home total surplus =
Derivation)
Home country (gains or loses) from trade.
Explanation of your answer:
b) Home total surplus (t) =
Derivation)