The following information applies to the market for a particular items in the absence of a unit excise tax:
Price($ per unit) Quantity Supplied Quantity Demanded
4 50 200
5 75 175
6 100 150
7 125 125
8 150 100
9 175 75
According to the information above, in the absence of a unit excise tax, what is the market price? What is the equilibrium quantity?.
Suppose that the government decides to subject producers of this item to a unit excise tax equal to $2 per unit sold. What is the new market price? What is the new equilibrium quantity?
What portion of the tax is paid by producers? What portion of the tax is paid by consumers?
Market price with no tax is where supply equals demand, so at $7.
b) The two dollar tax is reflected in the price that people have topay, but it does not give a firm extra income. For instance, pricewas $7 in part a. Now with the tax, people pay $9, but the firmonly earns $7. So the firm wants to sell 125, and consumers onlywant to buy 75. So basically, you look for where quantity demandedequals quantity supplied at a price level 2 dollars higher for theconsumers. Here it is $8. The firm earns 6 of that 8, so they wantto supply 100, and people demand 100 at a price of $8. Quantityequals 100.
c) Each side picks up one dollar of the tax; the firm used to make7 dollars per unit and now only makes six, and the consumer used topay 7 dollars and now they pay 8.
Well, well, well, looks like we have some taxing questions here! Let's dive in and find the answers.
In the absence of a unit excise tax, the market price is determined at the point where quantity supplied equals quantity demanded. From the information provided, we can see that at a price of $7, both the quantity supplied and quantity demanded are 125 units. Therefore, the market price is $7 and the equilibrium quantity is 125 units.
Now, let's sprinkle in some taxes and see what happens. When the government imposes a unit excise tax of $2 per unit sold, it affects the market price and equilibrium quantity. The tax is levied on the producers, so they will absorb some of the burden.
To find the new market price, we need to look at the point where the new quantity supplied (after the tax) equals the new quantity demanded. From the information provided, when the price is $9 (including the tax), the quantity supplied is 75 units, and the quantity demanded is 75 units as well. Therefore, the new market price is $9.
As for the new equilibrium quantity, it is the quantity at the new market price. In this case, it is 75 units.
Now to the fun part - who pays what! Since the tax is imposed on the producers, they bear the initial burden of the tax. In this case, the tax is $2 per unit sold. So, the producers would pay $2 for each unit sold.
However, we can't forget about our beloved consumers! The tax increases the cost of production for the producers, which could lead to a higher market price. So, consumers end up paying a portion of the tax in the form of a higher price. The increase in price from $7 (pre-tax) to $9 (post-tax) can be considered the consumer's portion of the tax payment.
I hope that brings a smile to your face as we unravel the taxing world of economics.
To find the market price and equilibrium quantity in the absence of a unit excise tax, we need to identify the point where the quantity supplied equals the quantity demanded. Based on the information provided:
Price($ per unit) Quantity Supplied Quantity Demanded
4 50 200
5 75 175
6 100 150
7 125 125
8 150 100
9 175 75
We can see that at a price of $7, the quantity supplied and the quantity demanded are both 125 units. Therefore, the market price is $7, and the equilibrium quantity is 125 units.
Now let's consider the scenario where the government imposes a unit excise tax of $2 per unit sold. In this case, the market price experienced by consumers will increase by the amount of the tax. To determine the new market price and equilibrium quantity, we need to adjust the demand and supply schedules to reflect the tax.
Price ($ per unit) Quantity Supplied Quantity Demanded
4 52 200
5 77 175
6 102 150
7 127 125
8 152 100
9 177 75
Now, at a price of $7, the quantity supplied is 127 units, and the quantity demanded is 125 units. This means that the new equilibrium quantity is 125 units. To find the new market price, we need to consider the price level where the quantity supplied equals the quantity demanded. In this case, it occurs at a price of $7.50, considering the $2 tax. Therefore, the new market price is $7.50.
Regarding the portion of the tax paid by producers and consumers, we can find it by comparing the prices before and after the tax.
Before the tax, the market price was $7, and after the tax, the market price is $7.50.
The portion of the tax paid by producers is the difference between the original market price and the price they receive after the tax. In this case, it is $7.50 - $7 = $0.50 per unit.
The portion of the tax paid by consumers is the difference between the price they paid before the tax and the new market price. It is $7 - $7.50 = $0.50 per unit.
Therefore, producers and consumers each pay $0.50 per unit of the $2 unit excise tax.
To determine the market price and equilibrium quantity in the absence of a unit excise tax, we need to look at the intersection of the quantity supplied and quantity demanded.
From the given information:
Price($ per unit) Quantity Supplied Quantity Demanded
4 50 200
5 75 175
6 100 150
7 125 125
8 150 100
9 175 75
We can see that at a price of $7, the quantity supplied and demanded are equal (125 units). This is the market equilibrium, where the quantity supplied meets the quantity demanded.
Therefore, in the absence of a unit excise tax, the market price is $7 and the equilibrium quantity is 125 units.
Now, let's consider the scenario where the government imposes a unit excise tax of $2 per unit sold on producers.
When a tax is imposed on producers, it affects the supply curve. The new supply curve will be shifted upward by the amount of the tax ($2 in this case).
The new supply curve with the tax will be:
Price($ per unit) Quantity Supplied Quantity Demanded
6 50 200
7 75 175
8 100 150
9 125 125
10 150 100
11 175 75
Now, we need to find the new equilibrium price and quantity. We can see that at a price of $9, the quantity supplied (125 units) equals the quantity demanded.
Therefore, with the unit excise tax imposed, the new market price is $9 and the new equilibrium quantity is 125 units.
To determine the portion of the tax paid by producers and consumers, we can calculate the price difference between the pre-tax and post-tax market.
In the absence of the tax, the market price was $7. With the tax, the market price increased to $9.
The portion of the tax paid by producers can be calculated by subtracting the pre-tax market price from the post-tax market price ($9 - $7 = $2 per unit).
The portion of the tax paid by consumers is the increase in price due to the tax ($9 - $7 = $2 per unit).
Therefore, in this scenario, producers bear the full burden of the $2 per unit tax.