Pizza Market

Suppose that on a given Saturday night the market willingness to pay for pizzas is given by the equation WTP=10-(Qd/20), where Qd is the total number of pizzas demanded. Also suppose that the market willingness to accept curve for pizzas is given by the equation: WTA=Qs/5, where Qs is the quantity of pizzas supplied.

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. What happens to the price that buyers pay for pizza, Pd? What about the price that sellers receive, Ps (that is, the price the 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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