Name Key

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             Supply

Q = 100 - (3/2) P     Demand

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 55 Quantity  17 1/2

3. What is the elasticity of demand at the equilibrium? = (55/17.5)(-3/2) = -4.71

4. Is demand elastic, inelastic, or unit elastic?

5. Calculate consumer surplus at the equilibrium: = (1/2)(66 2/3 - 55)(17.5) = 102.08

6. Calculate producer surplus at the equilibrium: = (1/2)(55-20)(17.5) = 306.25

7. An excise tax of $10 per visit is imposed on visitors coming to the island.  What is the new equilibrium quantity?

P = 30 + 2(100-3/2 P)

P = 57.5

Q = 100 - 3/2 (57.5) = 13.75

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? = 47.5

10. How much tax revenue is collected? = 10(13.75)

11. After the imposition of the tax what is consumer surplus?

= (1/2)(66 2/3 - 57.5)(13.75) = 63.02

12. After the imposition of the tax what is producer surplus?

= (1/2)(47.5 - 20)(13.75) = 189.06

13. What is the value of the trips to Bermuda that are no longer made as a result of the imposition of the tax?

Method 1: (1/2)(57.5 - 47.5)(17.5-13.75) = 18.75

Method 2: 102.08 + 306.25 - 63.02 - 189.06 - 137.5 = 18.75