Suppose that the aggregate supply function for watermelons is S(P) = 5P and the aggregate demandfunction is D(P) = 200 − 5P. Suppose that the market for watermelons is perfectly competitive.
i) What are the equilibrium price and quantity of watermelons?
ii) Now, suppose that the government imposes a $2 per unit tax on watermelon producers. What is thenew equilibrium price received by watermelon producers, the new equilibrium price paid by consumers,and the new equilibrium quantity? What are the government’s revenues from taxing watermelons?What is the deadweight loss to society of the tax?