00:01
In this question, we say that the market for pizza is characterized by a downward sloping demand curve and an upward sloping supply curve.
00:09
First thing we need to do in part a is draw the competitive market equilibrium.
00:16
So here's our downward sloping demand curve and our upward sloping supply curve.
00:22
And i'm just going to extend these lines to the margin here.
00:28
So we want to label the equilibrium pricing quantity.
00:31
And we know that the equilibrium price is just the intersection of supply and demand here, and it generates the following equilibrium quantity represented here.
00:43
And i'm just going to call this q1.
00:47
And we also want to identify the consumer surplus and the producer surplus.
00:51
Well, i'm going to put consumer surplus here and producer surplus that triangle there.
00:58
So if consumer surplus is a and producer surplus is that whole triangle.
01:04
Triangular region x down there.
01:07
We want to find out if there's any dead weight loss.
01:10
In this case, of course there isn't because this is just a free market equilibrium so the producers and consumers are allowed to interact as they would naturally want to.
01:20
So there's no dead weight loss here.
01:23
So no dead weight loss.
01:27
In part b, we're saying suppose the government forces each pizzeria to pay a $1 tax on each pizza salt.
01:35
I'm going to illustrate the effect of this tax on the pizza market and be sure to label the consumer surplus, producer surplus, government revenue, and dead weight loss.
01:44
So when i impose this $1 tax, essentially what i'm going to be doing is finding the area on this graph to the left of the equilibrium quantity where i can find a vertical distance of $1 that fits perfectly between the supply and demand curve.
02:01
So since i've labeled all this in general terms, i can just kind of pick wherever i want.
02:06
So i'm going to say, suppose that this vertical distance here is $1.
02:16
That's going to be our government tax...