Question

55 52.5 50 47.5 45 42.5 Stay 40 37.5 $ price A 32.5 30 27.5 25 22.5 20 17.5 15 12.5 10 7.5 2.5 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 951000510 In the above graph, a $5 per unit tax is charged to suppliers. i. locate the after-tax price paid by consumers (P) ii. locate the after-tax price received by producers (P) iii. locate the after-tax quantity sold in the market (Qc) iv. compute total tax revenue from this tax v. compute dead weight loss from this tax vi. who is more burdened by this tax? how do you know?

Answer 1

55 52.5 50 47.5 45 42.5 40 37.5 35 32.5 30 Pt27.5 en 25 Ps22.5 20 17.5 15 12.5 10 7.5 2.5 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 951000510 Qt Q

i.

After tax price paid by consumers is $27.5.

ii.

After tax price received by producers is $22.5.

iii.

It is 45 units of output at the after tax equilibrium.

iv.

Total tax revenue = 5*45

Total tax revenue = $225

v.

Dead weight loss = (1/2)*(27.5 - 25)*(50-45) + (1/2)*(25-22.5)*(50-45)

Dead weight loss = $12.5

vi.

Consumers and producers, both are equally burdened by the tax and so it is 50% for each. It can be identified by the movement from original price of 25 to what consumer pays ($27.5) and what producers receive ($22.5). So, it is $2.5 each to be paid by both.