1. (20 pts) Suppose that the total demand for products in Maryland is given by the equation Q = 450 – 5P, where Q is in millions. Suppose that the total supply function for products in Maryland is Q = 4P. For all answers in this question, round to two decimal places.
a. Suppose that there is currently a 10% sales tax on products in Maryland. What
are the equilibrium prices received by firms and paid by consumers? What are
the current consumer surplus, producer surplus, government revenue, and
deadweight loss associated with this tax? Who bears more of the tax burden?
b. Suppose there is a proposal to enact a 5% sales tax on services in Maryland and
also to lower the tax rate on products to 5%. Suppose that the total demand for
services in Maryland is given by the equation Q = 160 – P, and the corresponding
supply function is Q = 3P (Q is in millions here as well). What would the new
prices and quantities in each market (products and services) be? Would total
government revenue under this proposal be higher or lower than it currently is as
described in part a? Assume no sales tax on services in part a. Would total
deadweight loss be higher or lower?

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