Question

The following graph represents the demand and supply for an imaginary good called a pinckney.

The following graph represents the demand and supply for an imaginary good called a pinckney. The black point (plus symbol) indicates the pre-tax equilibrium. Suppose the government has just decided to impose a tax on this market; the grey points (star symbol) indicate the after-tax scenario.

Supply 7.00 5.00 3.00 100 20 QUANTITY (Pinckneys)

Complete the following table, given the information presented on the graph. 

Price producers receive before tax _______ 

Per-unit tax _______ 

Equilibrium quantity before tax _______ 


In the following table, indicate which of the previous graph's areas corresponds to each concept. Check all that apply. 


Concept 

Producer surplus before the tax is imposed 

Deadweight loss after the tax is imposed 

Consumer surplus after the tax is imposed 

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Answer #1

Price producers receive before tax = $ 5

Per unit tax = $ 4 (=$7-$3)

Equilibrium Quantity before tax = 20

Producer surplus before tax = D + E + F

Deadweight loss after tax is imposed = C + E

Consumer Surplus after tax = A

Additional,

Consumer Surplus before tax = A + B + C

Producer surplus after tax = F

Tax collection (after tax is imposed) = B + C

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Answer #2

a.

Per-unit tax: $4.00

Equilibrium quantity before tax: $12.00

Price consumers pay before tax: $5.00


Before the tax is implemented, the equilibrium price and quantity occur at the intersection of the demand and the supply curves. Therefore, the price consumers pay and producers receive before the tax must be $5.00, and the equilibrium quantity of pinckneys is 12.

After the tax is paid, the top grey star ($7.00) indicates the price consumers pay, whereas the bottom star ($3.00) indicates the price sellers receive. Because the per-unit tax must be the difference between these two prices, it is equal to $7.00-$3.00=$4.00. In other words, the tax of $4.00 per unit drives a wedge between the price paid by consumers and received by sellers. This, in turn, decreases the equilibrium quantity from 12 to 6 pinckneys.

Notice that the net result is the same, regardless of whether the tax is levied on consumers or producers: Consumers pay $7.00 per unit, and producers receive $3.00 after the tax is paid to the government. The only difference is what price is paid in the store, often called the retail price. If the tax is levied on producers, the retail price is $7.00 per unit because the producers will have to send the $4.00 per unit to the government. If it's levied on consumers, the retail price is $3.00 per unit because the consumers have the responsibility of paying the tax.


b.


Concept

A

B

C

D

E

F


Producer surplus  after  the tax is imposed

Deadweight loss after the tax is imposed

Consumer surplus before the tax is imposed



Concept

Before Tax

After Tax

Consumer SurplusA+B+C" role="presentation" style="display: inline; line-height: normal; text-align: left; word-spacing: normal; overflow-wrap: normal; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; padding: 0px; margin: 0px; position: relative;">A
Producer SurplusD+E+F" role="presentation" style="display: inline; line-height: normal; text-align: left; word-spacing: normal; overflow-wrap: normal; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; padding: 0px; margin: 0px; position: relative;">F
Tax RevenueN/AB+D" role="presentation" style="display: inline; line-height: normal; text-align: left; word-spacing: normal; overflow-wrap: normal; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; padding: 0px; margin: 0px; position: relative;">
Deadweight LossN/AC+E" role="presentation" style="display: inline; line-height: normal; text-align: left; word-spacing: normal; overflow-wrap: normal; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; padding: 0px; margin: 0px; position: relative;">
source: cengage
answered by: cashew nuts
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