# Let’s look at the market for new cars. Suppose that the inverse demand curve for new cars was given by the following equation: P = 27, 000 − 0.005Q Further,

Let’s look at the market for new cars. Suppose that the inverse demand curve for new cars was given by the following equation:

P = 27, 000 − 0.005Q

Further, imagine that the supply for new cars was given by the following equation:

P = 12, 000 + 0.02Q

a) (5 marks) Calculate the Consumer Surplus and Producer Surplus at the initial equilibrium point.

b) (5 marks) Suppose that the government feels like the purchase of new cars is leading to too much pollution. They wish to reduce the number of new cars purchased by making them more expensive. To achieve this goal they impose a price floor of $25,000 on the purchase of a new vehicle. Calculate the Consumer Surplus and Producer Surplus at this new equilibrium point. Calculate the Deadweight loss.

c) (5 marks) Was this policy a success? Who gains and who loses from this change, and by how much? Overall, is the economy in a better position than it was before? Is this a Pareto improvement?

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