Question

A cash-starved town decides to impose a $5 excise tax on T-shirts sold. The following table shows the quantity demanded and the quantity supplied at various prices. (Assume that the infinitely divisible) Price quantity quantity per shirt demanded supplied $190 60 $16 10 50 $13 20 40 $10 30 30 $7 40 20 $4 50 10 a. What are the equilibrium quantity and price before the tax is implemented? Determine the consumer and producer surplus before the tax. b. What are the equilibrium quantity and the equilibrium price a consumer pays after the tax is implemented? Determine the consumer and producer surplus after the tax. c. How much tax revenue does the town generate from the tax?

Answer 1

Price pushirt Quantity demanded Quantity supplieel $19 10 20 $ 46 $13 $ 10 $7 $4 30 40 50 tau, at price Before $10 1 quantity de I quantity demanded = quantity supplied = 30 - Huce the requilibrium quantity before tare is & 10 and equilibrium quantity before tantes 30 Shirts Now from the demand and supply schedult, we wscendaw is the demand and supply carve: candlanner

' . SVM Jiroul Subbly is o I no topo = - EP N w I GO een Hattoo 5 10 15 20 25 30 35 40 45 Sa Atti tan the supply curve will shitst upw and by the size of the tau Now, attu the tan implementation equilibrium Puce a consuer pays will be $12 and equilibrium quantity will be 15 skilts consues surplus Now before is t tau area 07 AA BC - ZX (19-10) x (30-0) = $135 Scanned with CamScanner

- producan sm plus before tan area of A WCB 184802 + x(10-1)^(-30-0) = $135 183, consues surplus afta tan = area of DATDA = { x( 19-12) X (15-6)* = $ 52,5 - Producu suples afeta tau= area of A WFS = X(7-1) X(15-0) = $45 Tan revcnue collected by gournment is given by the area of rectangle OST OF = (12–7) X (15-0) = $75 - cs Scanned with CamScanner