Question

7. Taxation An algebraic approach Suppose the supply of a good is given by the equation Q" = 48OP- 480, and the demand for the good is given by the equation QD = 960- 160P, where quantity (Q) is measured in millions of units and price (P) is measured in dollars per unit. The government decides to levy an excise tax of $1.00 per unit on the good, to be paid by the seller. Calculate the value of each of the following, before the tax and after the tax, to complete the table that follows: 1. The equilibrium quantity produced 2. The equilibrium price consumers pay for the good 3. The price received by sellers Before Tax After Tax Equilibrium Quantity (Millions of units) Equilibrium Price per Unit Paid by Consumers Price per Unit Received by Sellers Given the information you calculated in the preceding table, the tax incidence on consumers is per unit of the good, and the tax incidence on producers is per unit of the good. The government receives in tax revenue from levying an excise tax of $1.00 per unit on this good. True or False: The equilibrium quantity would have been the same if the tax had been levied on buyers instead. O True O False

Answer 1

Before tax 480P-480 = 960-160p 6hop = 1440 P = 2.25 Q = 480(2-25) -480 = 600 After tax : Q = 480 (P-1)- + 480 QS - 480P-960 480p 480p - 960 - 960 - 160p 6yol = 1920 - P = 3 Price received by selles = 3-1 = 2 Q = 960 - 160 3) = 480 Before tax After Equilibrium Q 600 480 Equilibrium p paid by comunes 2-25 Price received by sellers 2-25 tax 3 Tax incidence on consunes = 3-2-25= 0.75 incidence on produces = 1-0.75= 0.25 & tax Government receives 1(480) = 480 million in tax revenue True