Question

7. Effect of a tax on buyers and sellers The following graph shows the daily market for shoes. Suppose the government institutes a tax of $11.60 per pair. This places a wedge between the price buyers pay and the price sellers receive 50 45 40 Supply 35 - a 30 25 W 20 a 15 10 Tax Wedge 1 Demand 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Pairs of shoes)

Answer 1

Below table shows the change in quantity and price before and after tax Price Quantity Buyers Pay Price sellers (Pair of |(Dollars Receive ( Dollars Shoes) per pair) per pair) Before Tax After Tax 250 200 25 35 25 23.4 Tax burden on buyers - Increase in price paid by buyers-10 Tax burden on sellers - Decrease in price received by buyers - 1.6 Calculate price elasticity of demand Quantity at point B - Quantity at point A Price at point B+Price at point A Price at point A -Price at point BQuantity at point B + Quantity at point A 250 -200 25+35 35-25 250+ 200 50 60 10 450 0.66