Q: If the government collects $2.00 per pizza sold as tax and 7 million pizzas are sold after the tax, what is the total tax revenue collected?

$$ \text{Tax Revenue} = 2.00 \times 7,000,000 = 14,000,000 $$

Q: What is the formula for calculating deadweight loss from a tax?

$$ \text{Deadweight Loss} = \frac{1}{2} \times (Q_1$ - Q_2$) \times (P_{tax} - P_{eq}) $$

Question 1

Suppose the equilibrium price of pizzas is $$10.00 and 9 million pizzas are sold per month. After a government imposes a 2.00 $$per pizza tax, the equilibrium price rises to $11.00 and the equilibrium quantity falls to 7 million. What is the deadweight loss resulting from this tax?

Accepted Answer

Deadweight loss is the area of the triangle between the supply and demand curves from 7 million to 9 million pizzas. 
$$ 
	ext{Deadweight Loss} = \frac{1}{2} 	imes (9-7) 	imes (12-10) = \frac{1}{2} 	imes 2 	imes 2 = 2 
$$

Question 2

After the $2.00 per pizza tax, who bears the greater burden of the tax: consumers or producers?

Accepted Answer

Consumers, because the price they pay increases by $$1.00, while producers receive 1.00 $$less per pizza.

Question 3

What happens to economic surplus after the imposition of the $2.00 per pizza tax?

Accepted Answer

Economic surplus decreases due to the deadweight loss created by the tax.

Question 4

If the government collects $2.00 per pizza sold as tax and 7 million pizzas are sold after the tax, what is the total tax revenue collected?

Accepted Answer

$$
	ext{Tax Revenue} = 2.00 	imes 7,000,000 = 14,000,000
$$

Question 5

Which area on the graph represents the deadweight loss caused by the tax?

Accepted Answer

The triangle between the new and old supply and demand curves, from 7 million to 9 million pizzas.

Question 6

How does the imposition of the tax affect consumer surplus?

Accepted Answer

Consumer surplus decreases because consumers pay a higher price and buy fewer pizzas.

Question 7

How does the imposition of the tax affect producer surplus?

Accepted Answer

Producer surplus decreases because producers receive a lower price and sell fewer pizzas.

Question 8

What is the formula for calculating deadweight loss from a tax?

Accepted Answer

$$
	ext{Deadweight Loss} = \frac{1}{2} 	imes (Q_1$ - Q_2$) 	imes (P_{tax} - P_{eq})
$$

Question 9

If the demand for pizza is relatively inelastic, who will bear a greater burden of the tax?

Accepted Answer

Consumers will bear a greater burden because they are less responsive to price changes.

Question 10

What is the effect of the tax on the equilibrium quantity of pizzas sold?

Accepted Answer

The equilibrium quantity decreases from 9 million to 7 million pizzas.

Analyzing Economic Surplus and Price Controls in Microeconomics

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