Suppose the demand and supply curves for a large cheese pizza are given by:
Qd = 100 – 5P
Qs = 12 + 3P.
Using the demand and supply functions above, the equilibrium price of a pizza is ____, and the equilibrium quantity is ____. Illustrate your answer.
On the same graph above, show the effect on equilibrium price and quantity of a) an increase in the price of cheese, and b) a decrease in consumer income (assume pizza is a normal good)
Compute CS, PS and aggregate surplus. Illustrate on Graph.
Government wants to increase its revenues. Legislators decide that they will impose an excise tax of $2 per pizza on pizza vendors. Using the demand and supply curves above, the new equilibrium price and quantity of Pizza’s would be _____, ______. The producers will receive a net of tax price of ____. The government will collect total tax revenue of ______. Illustrate your answer.
Compute DWL. Illustrate DWL in the graph above. Briefly explain why the tax causes a dead weight loss.