Chapter 7, Problem 7P

To determine

a. The quantity of pizza bought and sold after tax imposition, the price paid by customers and the price received by producers.

b. The consumer surplus and the producer surplus after tax imposition and by how much has the tax imposition reduced consumer surplus and producer surplus.

c. The amount of tax revenue earned by Collegetown from this tax.

d. The deadweight loss from this tax.

Concept Introduction:

Excise tax:

A compulsory levy on the production or sale of a good.

Consumer Surplus:

The difference between what the consumer is willing to pay and what he actually pays.

Producer Surplus:

The difference between the amount a producer of a good gets and the minimum amount that he is willing to accept for the good.

Deadweight Loss:

It is the market or allocative inefficiency arising due to the disequilibrium in the demand and supply of a commodity.

Equilibrium:

Where quantity demanded of a good is equal to the quantity supplied. In the above case the equilibrium price is $7 and quantity is 3