Pizza Market

Suppose that on a given Saturday night the demand for pizzas is given by the equation Pb=10-(Q/20), where Pb is the price buyers pay for a pizza and Q is the total number of pizzas. Also suppose that the supply of pizzas is given by the equation: Ps=Q/5, where Ps is the price suppliers receive for a pizza.

1. What is the market equilibrium price and quantity of pizza? Draw a graph of the market equilibrium and label it thoroughly.
2. Now suppose the government levies a $5 tax on each pizza. The tax must be paid by the suppliers. What happens to the price buyers pay for pizza? What about the price sellers get to keep? The equilibrium quantity of pizza? Draw an appropriate diagram. How much revenue does the tax raise?
3. What does the tax do to consumer and producer surplus? How much deadweight loss does it create? How large is the deadweight loss per dollar of revenue raised by the tax?

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