Question

The graph shows the market for pillows in which the government has imposed a sales tax of $4 per pillow on buyers. 

Draw a point to show the price of a pillow and the quantity of pillows bought and sold with no tax. Label it 1. 

Draw a point to show the price paid by buyers and the quantity of pillows bought with the tax. Label it 2. 

Draw a point to show the price received by sellers and the quantity of pillows bought with the tax. Label it 3. 

The incidence of tax depends on 

A. the deadweight loss created by the tax 

B. the tax laws 

C. the price elasticity of demand and the price elasticity of supply 

D. how motivated the firm is to make the sale

Answer 1

Ans) Equilibrium is a point where quantity demanded is equal to quantity supplied. On graph, it is a point where demand and supply curve intersect. At this point, price received by sellers is equal to price paid by buyers.

When government imposes tax, a wedge is created. This wedge is equivalent to the value of tax. Imposition of tax lowers the price received by sellers and raises the price paid by buyers. Also it results in creation of deadweightloss.

Tax burden is shared by both buyers and sellers. But tax burden falls more heavily upon the less elastic side of the market. That is tax depends upon the price elasticity of demand and supply.

a Price paid by buyer Price received by sellez after tax no I t ta Quantity Hit > 0 . ora 4 #

Incidence of tax depends upon the price elasticity of demand and supply. Option c.