Question

The following graph shows the daily market for wine when a tax on sellers is set at $0 per bottle. Suppose the government institutes a tax of $40.60 per bottle, to be paid by the seller. (Hint: To see the impact of the tax, enter the value of the tax in the Tax on Sellers field and move the green line to the after-tax equilibrium by adjusting the value in the Quantity field. Then enter zero in the Tax on Sellers field. You should see a tax wedge between the price buyers pay and the price sellers receive.) Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Graph Input Tool Market for Wine 100 Quantity (Bottles of wine) Demand Price (Dollars per bottle) 132.00 Supply Price (Dollars per bottle) 0.00 PRICE (Dollars per bottle) Supply Shifter Demand Tax on Sellers (Dollars per bottle) 0.00 0 100 200 300 400 500 600 700 800 900 1000 QUANTITY (Bottles of wine)

Answer 1

At equilibrium, demand equals supply where price is $100 and quantity traded is 500 units.

Due to the tax of $40.6, tax would more on sellers side due to less elasticity of it. We can calculate the burden on each party by observing the intercept of demand and supply on Price (Vertical line). As demand curve touches Price at level P = 140 while if we extend supply curve (As supply curve is constant line, the slope would remains the same, across the curve), it touches the Price line at -150. As the demand curve Y-intercept is 40 more than equilibrium price level and supply curve X-intercept is 250 less than equilibrium price level. Total gap between two intercept is 290.

% of demand curve intercept above the equilibrium price = (40 / 290) * 100 = 13.8%

% of supply curve intercept below the equilibrium price = (250 / 290) * 100 = 86.2%

It says that 13.8% of $40.6 falls on consumers which equals to $5.6 while 86.2% of $40.5 falls on producers which is $35.At $65, producers will supply units equal to 430.

Supply 1407 burden Consumet 16 Burden to on Demand کیرلا 300 430

	Quantity	Price buter pay	Price seller receive
Before tax	500	100	100
After Tax	430	105.6	65

Market with less elasticity or inelastic market bears more burden of the tax.