The demand for ice cream is given by QD = 20 – 2P, measured in gallons of ice cream. The supply of ice cream is given by QS = 4P – 10.
a. Graph the supply and demand curves, and find the equilibrium price and quantity of ice cream.
b. Suppose that the government legislates a $1 tax on a gallon of ice cream, to be collected from the buyer. Plot the new demand curve on your graph. Does demand increase or decrease as a result of the tax?
c. As a result of the tax, what happens to the price paid by buyers? What happens to the price received by sellers? How many gallons of ice cream are sold?
d. Who bears the greater burden of the tax? Can you explain why this is so?
e. Calculate consumer surplus both before and after the tax.
f. Calculate producer surplus both before and after the tax.
g. How much tax revenue did the government raise?
h. How much deadweight loss does the tax create?