Que.1
Given the following information:
Demand: Qd = 200 – 5P
Supply: Qs = 5P
If a quantity tax of $2 per unit sold is imposed,
(a) Considering that the government will earn revenue, overall, do you think that society benefits from such a move? Explain.
choose one from each.
a)yes or no
> remain unchanged
>decrease
>yes
>Increase
>no
b) Buyer Price
>Remain unchanged
>decrease
>Yes
>Increase
>no
c) Seller Price
>remain unchanged
>Decrease
>Yes
>Increase
>No
d)Quantity Traded
>Remain Unchanged
>Decrease
>Yes
>Increase
>No
Que 2.
Given the following information:
Demand: Qd = 200 – 5P
Supply: Qs = 5P
If a quantity tax of $2 per unit sold is imposed,
Calculate:
(c) Supply equation after the tax.
choose one
>QD=200-5p
>QD=210-5p
>QS=5p-2
>QS=-10+5p
>QD=190-5P
>QS=5P-2
a) Society will not benefit from this move.
Ans is NO, Society benefit decreases.
Explanation:
Even though government will earn tax revenue, the tax will increase market price and decrease market quantity. So social benefits will decrease due to dead weight loss which arise due to this tax.
Total surplus before tax = (1/2)*(40-20)*100 + (1/2)*(20-0)*100 = 1000+ 1000 = 2000
Total Surplus after tax = (1/2)*(40-21)*95 + (1/2)*(19-0)*95 + 190 = 1995
As total surplus decreases means society benefit decreases.
b) Buyer Price -Increases
c) Seller price - Decreases
d) Quantity traded -Decreases
Explanation:
In pre-tax equilibrium, Qd = Qs.
200 - 5P = 5P
10P = 200
P = 20
Q = 5 x 20 = 100
After-tax supply function is:
Qs = 5(P - 2) = 5P - 10
Demand function remains unchanged,
200 - 5P = 5P - 10
10P = 210
P = 21 (Price paid by buyers)
Price received by sellers = 21 - 2 = 19
Q = 200 - (5 x 21) = 200 - 105 = 95
Tax revenue = Unit tax * After-tax quantity = 2 x 95 = 190
Deadweight loss = (1/2) * unit tax * Change in quantity = (1/2) x 2 x (100 - 95) = 1 x 5 = 5
c) After-tax supply function is:
Qs = 5(P - 2) = 5P - 10
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