Assignment task: In mid-May, there is a spike in demand for flowers. With the end of Mother's Day, the market for flowers goes back to normal and is described by the following supply and demand equations:
QS = 4p
QD = 60 - p
where Q is the number of bouquets of flowers, and the p is the price of one bouquet.
a) Solve for the equilibrium price and quantity of bouquets of flowers.
b) The government wants to take advantage of this spike and decides to put a tax of T on buyers, so the new demand equation is QD = 60 - (p + T). Solve for the new equilibrium price and quantity. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?
c) Using your answer to part (b), solve for the amount of tax revenue as a function of T. Graph this relationship for T between 0 and 30.
d) Solve for deadweight loss as a function of T. Graph this relationship for T between 0 and 30.
e) The government levies a tax of $5 per bouquet because it wants more money. Is this a good policy? Why or why not? Can you propose a better policy?