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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

The market for pizza is characterized by a downward-sloping demand curve and an upward-sloping supply curve.

a. Draw the competitive market equilibrium. Label the price, quantity, consumer surplus, and producer surplus. Is there any deadweight loss? Explain.

b. Suppose that the government forces each pizzeria to pay a $1 tax on each pizza sold. Illustrate the effect of this tax on the pizza market, being sure to label the consumer surplus, producer surplus, government revenue, and deadweight loss. How does each area compare to the pre-tax case?

c. If the tax were removed, pizza eaters and sellers would be better off, but the government would lose tax revenue. Suppose that consumers and producers voluntarily transferred some of their gains to the government. Could all parties (including the government) be better off than they were with a tax? Explain using the labeled areas in your graph.

Sub part (a):

To determine
The impact of tax on pizza.

Explanation

It is given that the supply curve of pizza slopes upward and the demand curve slopes downward. Thus, the equilibrium will be determined at the intersection of the demand curve and the supply curve on the graph as follows:

From the above graph, the demand curve for the pizza slopes downward and the supply curve slopes upward as given in the question. The equilibrium is obtained at the point of intersection and the equilibrium price is P1 and the equilibrium quantity is Q1 respectively. The consumer surplus in the economy is the area of A+B+C and the producer surplus is the area of D+E+F...

Sub part (b):

To determine
The impact of tax on pizza.

Sub part (c):

To determine
The impact of tax on pizza.

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