Suppose the market for a bottle of flea shampoo can be described by the following equations: Demand: Qd = 17 - .25P Supply: Qs = 3 + 1.75(P - tax) Where P is the price in dollars per bottle and Q is quantity in thousands of bottles.
A. Draw the model to illustrate the market for bottle of flea shampoo assuming tax = 0.
1) Label the equilibrium price and equilibrium quantity.
2) Calculate the X intercept for supply and the X and Y intercepts for demand.
B. Suppose the government imposes an excise tax of 50 cents per bottle to pay for dogs in county shelters.
1) Add this tax to your graph.
2) What will the new equilibrium price and quantity be after the tax?
3) How much revenue will the government raise?
4) On a new graph, show the change in welfare the tax brings. How much economic surplus is lost due to the tax?