The market for candles has the following supply and demand curves:
QS = 3P-3
QD = 32-2P
a. Plot the demand and supply curves
b. Suppose that the government places a tax of five dollars on each candle sold (paid for by firms). Show the effect of the tax on the supply and/or demand curves in the graph above
c. List the equilibrium price paid and quantity sold after the tax is imposed
d. Describe the tax incidence- how much of the tax is paid by consumers and how much is paid by producers?
e. Calculate the dollar value of consumer surplus, producer surplus, government revenue, and deadweight loss after the tax is imposed
f. Suppose that instead of imposing the tax of $5 per candle, the government passed a law setting a price floor of $10 on candles. What would be the dollar values of producer surplus and consumer surplus with the price floor in place? What is the deadweight loss from the price floor?
g. What is the difference between the impact of the price floor in this case and the impact of the tax?