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Consider the following model for the Latte market. Suppose the aggregate demand for Lattes is given by Qd = 5 - P where P denotes the price and Q denotes the quantity of Latte in terms of thousands of Latte demanded. The aggregate supply for Lattes is given by Qs = P/2.
a) Compute the Latte's market equilibrium. What are the equilibrium price andquantity, p∗ and q∗?1
b) Compute and graphically depict consumer surplus and producer surplus.
c) Now suppose a unit tax of t = $1 is imposed on each Latte that is purchased suchthat the consumers must pay $(P +1) per Latte. Compute the Latte market equilibriumwith the tax. What are the equilibrium price and quantity, p and q? Compute andgraphically depict consumer surplus, producer surplus, tax revenue, total surplus, anddeadweight loss.
d) Return to a situation without tax. Now suppose that the government imposes amandate forcing suppliers to only use organic coffee beans when making Lattes. Supposethat using organic coffee beans increases the cost of making a Latte by $1. However,it does not change the value of the Latte for consumers. Compute the Latte marketequilibrium with the mandate. What are the equilibrium price and quantity, p and q?
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