Question

1. Suppose that people expect that the price of computers will rise next month. At the same time governments impose a $3.00 tax on the computer industry.    What happens to equilibrium price and quantity?   Illustrate using a graph.   

Answer 1

Ans) When consumers expect the price to rise next month, they will buy more computers at present. Demand curve will shift to the right.

When government imposes tax, the effect of tax will be similar to the effect of decrease in supply. So the supply+tax curve will be on left of supply curve. That is the effect will look like shift of supply curve to the left.

Now there can be three possible cases, depending upon the magnitude of shift of demand curve.

1) If shift in demand curve = supply + tax shift , quantity will remain same and price will rise.

2) When shift in demand curve > supply + tax shift, both quantity and price will rise.

3) When shift in demand < shift in supply + tax, quantity will fall and price will rise.