Question

Refer to the above figure and answer the following questions: 

• 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

1) when the government imposes a tax of $8 per shirt, the buyer and seller equally share the burden of the tax, now buyer will pay $14 which higher than the equilibrium price $10 that buyer paid before a tax imposed similarly now seller will receive $6 which is lower than equilibrium price $10 that seller received before a tax imposed

2)because of a tax, now the market shrunk to the 6 units of the shirts for which buyer will higher price and seller will receive less than the before tax.

Tax revenue= ($14 -$ 6) x (6-0)

= $48

3) the price buyers paid for each shirt before tax imposed = $10

the price buyers paid for each shirt after the tax imposed = $14

4) the price sellers received for each shirt before tax imposed = $10

the price sellers received for each shirt after the tax imposed = $6