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 6.50 PRICE {Dolars per pinckney) 8 QUANTITY (Pinckneys) Complete the following table, given the information presented on the graph. Result Value Per-unit tax Price consumers pay after tax Equilibrium quantity after tax In the following table, indicate which areas on the previous graph correspond to each concept. Check all that apply. Concept A B C D E F Consumer surplus after the tax is imposed 0 0 0 0 0 0 Tax revenue after the tax is imposed 0 0 0 0 0 0 Producer surplus after the tax is imposed 0 0 0 0 0 0

Answer 1

Per unit tax is the difference between the price consumers pay and the price producers receive.

Price paid by consumers=6.5

Price received by producers=3.5

Per unit tax=3

Consumer surplus after tax-A

Producer surplus after tax-F

Tax revenue=B+D

Consumer's surplus is the area below the demand curve and above the price level.

Producer's surplus is the area above the supply curve and below the price level.

Tax revenue=Tax*Quantity

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