Question

Suppose the current equilibrium price of cheese pizzas is ​$9.00​, and 10 million pizzas are sold per month. After the federal government imposes a ​$4.00 per pizza​ tax, the equilibrium price of pizzas rises to ​$11.00​, and the equilibrium quantity falls to 6 million. Compare the economic surplusLOADING... in this market when there is no tax to when there is a tax on pizza. With the​ tax, the change in economic surplus is

Answer 1

The producer surplus before tax is $45 million.

The producer surplus after tax is $33 million.

Step-by-step explanation:

The producer surplus is the difference between the minimum price a producer is willing to accept and the price he really gets.

The imposition of a tax reduces the price received by a seller such that the supply curve shifts to the left. The equilibrium quantity decreases.

The producer surplus before tax

=
`(1)/(2) *\ price\ *\ quantity`

=
`(1)/(2)\ *\ 9\ *\ 10`

= $45 million

The producer surplus after tax

=
`(1)/(2) *\ price\ *\ quantity`

=
`(1)/(2)\ *\ 6\ *\ 11`

= $33 million

With the imposition of tax the producer surplus falls by $12 million.