Consider the market for Shiraz wine. The market demand and supply are given by:
QD = 10 - PD and QS = 4 + 2 PS,
a. Find the equilibrium price and quantity traded and illustrate the equilibrium on a diagram (assuming there are no taxes or subsidies, and the notation is the same as that in question 2).
b. Suppose a tax of $3 per pint is imposed on the producers of Shiraz wine. What is the new equilibrium price and quantity traded? Show this on the same diagram as in part (a).
c. After the imposition of the tax what price do consumers now pay and how much do producers receive after tax?
d. How much revenue does the government raise from the tax?
e. Using your answer to part (c) to explain what is meant by producers passing through a tax. What enables producers to do this?
f. Suppose that $2 is the maximum per unit tax that governments can impose on the sellers of Shiraz wine. Under what circumstances can the government maximize its tax revenue, i.e., when can it make the most money from this tax? Explain your answer.