The demand equation for champagne is given by P = 10 - Q. The supply schedule for champagne is given by P = Q. Note that P denotes price per bottle in dollars, and Q is quantity measured in thousands per week.
a. Use algebra to find the equilibrium price of champagne, the equilibrium quantity traded, and the total revenue of champagne makers.
b. Now suppose the government imposes a per unit tax on champagne of $2 per bottle. That is, each time champagne producers sell a bottle of champagne they have to pay the government a tax of $2. What is the new supply equation with the tax?
c. What is the new equilibrium price and quantity with the tax?
d. How much of the $2 tax is paid by the consumers? How much of the $2 tax is paid by the producers?
e. Show the effect of the tax in a diagram by graphing the original demand and supply equations and then drawing in the supply equation after the tax into the same diagram. Indicate the equilibrium price and quantity before and after the tax. Also indicate the net price per bottle after the tax (i.e. the price received by the producers once they have paid the tax).
f. Use the diagram to calculate the deadweight loss from the tax.
g. How much revenue does the government raise from the tax?