Question

The graphs below show the market for bags of potato chips, which is currently at an equilibrium price of $1.33 per bag and an equilibrium quantity of 5.33 million bags. Suppose that, in an attempt to lower blood pressure and reduce healthcare costs, the government imposes a $1.00 excise (or commodity) tax on potato chips. Please scroll down to answer all 6 questions.
The graphs below show the market for bags of potato chips, which is currently at an equilibrium price of $1.33 per bag and an equilibrium quantity of 5.33 million bags. Suppose that, in an attempt to lower blood pressure and reduce healthcare costs, the government imposes a $1.00 excise (or commodity) tax on potato chips. Please scroll down to answer all 6 questions. 1. Suppose the government levies this tax on manufacturers for each bag of potato chips they produce. Please shift the curve(s) to illustrate this. 2. What is the price paid per bag by consumers (PC) with this new tax? 4.5 Number 3.5 2.5 Supply 3. What is the price received net of tax (Pp) per bag by producers with this new tax? 1.5 Number Demand 0.5 1 3 5 6 7 8 9 10 Quantity

Answer 1

1. When a tax of S1 is levied on manufacturers, the supply curve shifts upwards by S1.00. The new supply curve is shown in the figure below New Supply 3.5 2.5 1.5 0.5 0 1 2 3 5 6 78 9 10 Quantity 2. The intersection of the demand and the new supply curves reflects the price paid by consumers with this new tax; it is 3. The price received by the producers is the price paid by the consumers minus tax, i. e. S|I (-S2-$1) 4. When a tax of S1 is levied on consumers, the demand curve shifts downwards by S1.00. The new demand curve is shown in the figure below 5 3.5 2.5 0.5 New demand 012 35 6 7 8 9 10 Quantity 5. The intersection of the new demand and the supply curves reflects the price received by the producers net of tax, it is S1 Since consumers pay a tax of S1 for each unit that they buy, the effective price paid by the consumers is the price received by the producers plus tax, i.e, S2 (S1+S1) 6. The intersection of the new demand and the supply curves reflects the price received by the producers net of tax, it is ญี