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ps6new - Problem Set #6 Solutions Chapter 8 1. a.

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Problem Set #6 – Solutions Chapter 8 1. a. Figure 3 illustrates the market for pizza. The equilibrium price is  P 1 , the  equilibrium quantity is  Q 1 , consumer surplus is area A + B + C, and producer  surplus is area D + E + F. There is no deadweight loss, as all the potential gains  from trade are realized; total surplus is the entire area between the demand and  supply curves: A + B + C + D + E + F. Figure 3 b. With a $1 tax on each pizza sold, the price paid by buyers,  P B , is now higher than  the price received by sellers,  P S , where  P B  =  P S  + $1. The quantity declines to  Q 2 consumer surplus is area A, producer surplus is area F, government revenue is  area B + D, and deadweight loss is area C + E. Consumer surplus declines by B  + C, producer surplus declines by D + E, government revenue increases by B +  D, and deadweight loss increases by C + E. c.
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This note was uploaded on 10/11/2011 for the course EC 101 taught by Professor Idson during the Spring '08 term at BU.

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ps6new - Problem Set #6 Solutions Chapter 8 1. a.

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