Homework Answers
The equilibrium price before tax = $6 and equilibrium quantity = 12 pies.
Now, suppose sales tax of $7 per pie is imposed. The supply curve shifts to the left by $7 and equilibrium quantity falls to 6 pies.
The new price of pies = $10 per pie.
Consumers pay $10 per pie
Consumer surplus decreases.
Before tax , CS= (0.5)(14-6)(12)= $48
After tax : CS= (0.5)(14-10)(6)= $12
So, Consumer surplus decreases by $(48-12)= $36.
Producers receive $3 after tax.
Producer surplus decreases after tax.
Producer surplus before tax = (0.5)(6-0)(12)= $36
Producer surplus after tax = (0.5)(3-0)(6)= $9
This means producer surplus decreases by $(36-9)= $27
Collection for tax revenue =(Tax)(New equilibrium quantity)= (7)(6)= $42
Deadweight loss = (0.5)(10-3)(12-6)= $21
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