Question

1. Suppose the demand and supply curves for a large specialty pizza are given by:

Qd = 120 – 10P

Qs = -30 + 5P.

1. Using the demand and supply functions above, the equilibrium price of a pizza is ____, and the equilibrium quantity is ____. Illustrate your answer.
2. Compute Price elasticity of demand and supply at this equilibrium.
3. Compute CS and PS and illustrate on a graph.
4. Suppose that the government decrees that a specialty cannot be sold above $8. As a result of the decree, CS will increase/decrease by _____; PS will increase/decrease by _____. Show computations.
5. Government wants to increase its revenues. Legislators decide that they will impose an excise tax of $3 per pizza on pizza vendors. After the tax is imposed, consumers will pay a price of _____ per pizza and buy (quantity) _____ Pizzas. The sellers will receive a price of ____ per pizza. Illustrate on same graph (part d).
6. The government will collect total tax revenue of ______. Compute DWL and illustrate DWL in the graph above.
7. Who pays more of the tax on the Pizza? Explain why using the price elasticity of demand/supply you have computed in part (b) above.

Answer 1