Question

price is 10 and quantity is 10.... where the market equilibrium price is....

• If the government imposes a tax of $8 per shirt, then what will be the tax burden on buyers and what will be the tax burden on sellers?

• Did the market grow or shrank as a result of tax? How much was the tax revenue generated as a result?

• What was the price buyers paid for each shirt before the taxes were imposed and what they paid after the taxes?

• What was the price sellers received per shirt before the taxes and what did they receive after the taxes?

Answer 1

As the elasticity of demand of shirt for the buyers and elasticity of supply of the shirt for the sellers is not given , we will consider that if tax is imposed on shirts, the burden of the tax will be equally shared by the buyers and the sellers. So the burden of tax on buyers will be $4 and the burden of tax on sellers will be $4.

As the tax has been imposed on the shirt, the buyers will now have to pay more for buying the shirt whereas the sellers would receive less after selling the shirt. So the buyers who cannot afford to pay higher price for the shirt will leave the market and the sellers who cannot afford to sell the shirt at lower price will also leave the market. So we can conclude that the market will shrink after the imposition of tax. The revenue generated by the government will be 8 times the number of shirts being sold in the market because the government is receiving a tax of $8 on every shirt being sold in the market.

Before the taxes were imposed , the buyers paid $10 for every shirt whereas after the imposition of tax they pay (10+4) = $14 for every shirt.

Before the taxes were imposed , the sellers received $10 for every shirt whereas after the imposition of tax they receive only (10-4) = $6 for every shirt.