Homework #4, Econ 306, Prof. Hanson.

Assume that the demand for backrubs in Fairfax on any given day is Q = 10 - 2 P, while the supply is given by Q = P+1.

1. What is the consumer surplus, producer surplus, and dead weight loss?

2. If a “sin” tax of $3 per backrub were imposed on the buyers, what would be the consumer surplus, producer surplus, and dead weight loss? What would the tax revenue be?

3. If a law were passed prohibiting the sale of backrubs, but allowing people to give backrubs for free, what would be the consumer surplus, producer surplus, and dead weight loss? How many people would want but not get a free backrub? (Assume people have to stand in line to get their “free” backrubs, and all have the same value of time.)