Question

The following figure illustrates a standard market-demand curve and market-supply curve, with price per unit measured on the vertical axis and quantity measured on the horizontal axis. Price Demand Supply 0 1 2 3 4 5 6 7 8 9 10 Quantity Figure Description: Quantity demanded and quantity supplied is measured on the horizontal axis and price per unit is measured on the vertical axis. One downward sloping demand curve is provided and is labeled Demand. One upward sloping supply curve is provided and is labeled Supply. When price per unit exceeds $5, quantity supplied exceeds quantity demanded. When price per unit is below $5, quantity demanded exceeds quantity supplied. When price per unit is $5, quantity demanded is 5 units and quantity supplied is 5 units. Referring to the figure, suppose a per unit tax of $4 is imposed. With the tax in place, what price to buyers (i.e. consumers pay)? $3 $5 $7 $9

Answer 1

Answer 1. $7.

Reason- After the tax of $4, Price paid by consumers is decided by new Equilibrium point.

After tax, Consumers pay $7 instead of $5.

Answer 2. $3

Reason- After tax, producers receive $3 instead of $5.

Answer 3. 3 units

Reason- After tax of $4 per unit. New Equilibrium Quantity is 3 units instead of 5 units.

Answer 4. Decreased production and consumption by 2 units.

Reason- Before tax, equilibrium Quantity=5 units

After tax, equilibrium Quantity=3 units

So, production and consumption falls by 5-3= 2 units.

Answer 5. Analyses how economic phenomena only impacts a singlr market, rather than all possible related markets or an entire system of related markets.

Reason- Partial equilibrium analysis only takes into consideration one market which is directly impacted ignoring other possibly related markets.