Department of Economics
Elasticity, Taxes and Consumer Surplus
Bermuda's principal industry is tourism. The island nation 'exports'
sun, sand and surf to foreign countries by allowing foreigners to come to
Bermuda for short stays. The equations describing the market for visits
to Bermuda are
P = 20 + 2 Q
P = 100 - (3/2) Q
1. In the boxes indicate which of the equations is the demand curve and
which is the supply curve.
2. What are the equilibrium price and quantity? Price
3. What is the elasticity of demand at the equilibrium?
4. Is demand elastic,
5. Calculate consumer surplus at the equilibrium:
6. Calculate producer surplus at the equilibrium:
7. An excise tax of $10 per visit is imposed on visitors coming to the
island. What is the new equilibrium quantity?
8. What is the gross price paid by the traveler?
9. What is the net price received by the suppliers of trips to the Bahamas?
10. How much tax revenue is collected?
11. After the imposition of the tax what is consumer surplus?
12. After the imposition of the tax what is producer surplus?
13. What is the value of the trips to Bermuda that are no longer made as a
result of the imposition of the tax?