Effect of a tax on buyers and sellersThe following graph shows the daily market for jeans. Suppose the government institutes a tax of $10.15 per pair. This places a wedge between the price buyers pay and the price sellers receive. 0100200300400500600700800900100050454035302520151050PRICE (Dollars per pair)QUANTITY (Pairs of jeans)Tax WedgeDemandSupply Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax. QuantityPrice Buyers PayPrice Sellers Receive(Pairs of jeans)(Dollars per pair)(Dollars per pair)Before Tax After Tax Using the data you entered in the previous table, calculate the tax burden that falls on buyers and on sellers, respectively, and calculate the price elasticity of demand and supply over the relevant ranges using the midpoint method. Enter your results in the following table. Tax BurdenElasticity(Dollars per pair)Buyers Sellers The burden of the tax falls more heavily on the elastic side of the market. 504540DemandSupply3530Tax Wedge20 +15101002003004005006007008009001000QUANTITY (Pairs of jeans)PRICE (Dollars per pair)25

An initial 20-cent gas tax would be a good starting point. One of two parties could be subject to…

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Effect of a tax on buyers and sellers

The following graph shows the daily market for jeans. Suppose the government institutes a tax of $10.15 per pair. This places a wedge between the price buyers pay and the price sellers receive.

0100200300400500600700800900100050454035302520151050PRICE (Dollars per pair)QUANTITY (Pairs of jeans)Tax WedgeDemandSupply

Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax.

	Quantity	Price Buyers Pay
(Pairs of jeans)	(Dollars per pair)	(Dollars per pair)
Before Tax
After Tax

Using the data you entered in the previous table, calculate the tax burden that falls on buyers and on sellers, respectively, and calculate the price elasticity of demand and supply over the relevant ranges using the midpoint method. Enter your results in the following table.

	Tax Burden	Elasticity
(Dollars per pair)
Buyers
Sellers

The burden of the tax falls more heavily on the elastic side of the market.

50
45
40
Demand
Supply
35
30
Tax Wedge
20 +
15
10
100
200
300
400
500
600
700
800
900
1000
QUANTITY (Pairs of jeans)
PRICE (Dollars per pair)
25

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