Answer to Question #167186 in Microeconomics for Tanvi

Question

Consider the market for pizza in Middleton, Ontario, whose demand and supply schedules are given in

the table below.

Price of Pizza ($) Quantity Demanded Quantity Supplied

QD 0,1,2,3,4,5,6,7,8,9 QS 6,5,4,3,2,1,0,0,0,0 price 10, 9,8,7,6,5,4,3,2,1

1. Graph the demand and supply curve.
2. What is the consumer surplus and producer surplus?
3. Suppose the government were to impose a sales tax of $4 per pizza. What is the quantity of pizza
4. bought and sold after the imposition of the tax? What is the consumer price? What is the price
5. producers receive?
6. What is the consumer surplus and producer surplus after the imposition of the tax? By how much
7. have consumer surplus and producer surplus each changed?
8. How much tax revenue does this tax generate for the government?
9. What is the deadweight loss associated with this tax?

Answer 1

1.

Pe is the equilibrium price=3

Qe is the equilibrium quantity =7

2.

consumer surplus

$=1/2*(7-4)*(6-3)=4.5$

$=$producer surplus

$=1/2*(7-4)(3-0)=4.5$

3.

after the imposition of tax, only 0ne pizza will be bought and sold

4.

the consumers before imposition of tax pay $9

5.

the producers before imposition of tax receive $5.

6.

consumer surplus and producer surplus are both zero.

consumers who still buy pizza at $9 are only willing to pay $9. therefore consumer surplus is $9-$9=0. it costs the producer a cost of $5 per pizza and this is the amount he receives hence zero producer surplus.

7.

both consumer surplus and producer surplus decreases by $3 compared to the situation before imposition of tax where the equilibrium price was $7

8.

the government collects a tax of $4 per pizza sold. since only one pizza will be sold, it will collect a total tax of $4

9.

total surplus lost = $6, but only a revenue of $4 is earned hence deadweight loss is $6-$4=$2