Question

1. Understanding the implications of taxes on welfare The following graph represents the demand and supply for pinckneys (an imaginary product). The black point (plus symbol) indicates the pre-tax equilibrium. Suppose the government has just decided to impose a tax on this market; the grey points (star symbol) indicate the after-tax scenario. Demand Supply A 15.00 B 11.00 1 PRICE (Dallars per pinckney) D E 7.00 F 1 QUANTITY (Pinckneys) Complete the following table, given the information presented on the graph. Value Result Equilibrium quantity after tax Price consumers pay before tax Per-unit tax S In the following table, indicate which areas on the previous graph correspond to each concept. Check all that apply. A B с D E F Concept Producer surplus before the tax is imposed Consumer surplus after the tax is imposed O Deadweight loss after the tax is imposed 0 U U U U 0

please help and explain!

Answer 1

Equilibrium quantity after tax: 5 units

Price consumers pay before tax: $11

Per unit tax: $8

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Producer surplus before the tax is imposed: D + E + F

Consumer surplus after the tax is imposed: A

Deadweight loss after the tax is imposed: C + E

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Explanation:

The tax places a wedge between the demand and supply curves. Without tax, market price was $11. After tax, buyers pay $15 and sellers receive $7. Market quantity falls.

The per unit tax of $8 generates tax revenue for the government.

The rise in price and fall in quantity creates deadweight loss, or fall in surplus.