Essentials of Economics (MindTap Course List)
8th Edition
ISBN: 9781337091992
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 8, Problem 3PA
Sub part (a):
To determine
The burden of tax and the
Sub part (b):
To determine
The burden of tax and the elasticity of
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In this module, we learned about deadweight loss and analyzed the welfare effects of a tax on a good. Now consider the opposite policy. Suppose that the government subsidizes a good: For each unit of the good sold, the government pays $2 to the buyer. How does the subsidy affect consumer surplus, producer surplus, tax revenue, and total surplus? Does a subsidy lead to a deadweight loss? Why or why not?
Consider the market for BP gasoline. If the market has a very elastic supply and a very inelastic demand, how would the burden of a tax on BP gasoline be shared between producers and consumers? Draw a graph to support your answer.
Suppose the demand and supply curves are described by
MC = 2.45 + 1.1Q
WTP = 7.55 - 0.90Q
Further, suppose a tax is placed on either buyers or sellers and the size of the tax is 1.7.
A. What is consumer surplus after the tax?
B. What is producer surplus after the tax?
C. What is the tax revenue?
D. What is the deadweight loss?
E. Which curve is more elastic?
Demand
O Supply
Chapter 8 Solutions
Essentials of Economics (MindTap Course List)
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- You have the following information from the market Demand function: QD=280−5P Supply function: QS=−70+5P 1. What is the willingness to buy? 2. What is the economic cost of the sellers? The government has imposed a tax regulation of 10 takas. Assume that buyers and sellers both share the tax burden equally. 3. What is the consumer surplus after tax? 4. What is the producer surplus after tax? 5. What is the tax revenue?arrow_forwardSuppose the market for cigarette is competitive. An economist estimates the price elasticity of demand and supply for cigarette are -0.8 and 0.7 respectively. Suppose the government imposes a per-unit tax on the cigarette sellers. Who, buyers or sellers, would share a heavier tax burden? Explain your answers without calculation.arrow_forwardConsider a market where supply and demand curves are given by Q = 4P and Q = 12 - 2P. Calculate the equilibrium price and quantity in this market. Now consider a government that collects a unit tax of 0.2 liras for every unit of good sold in the market from the producers. What is the new supply curve? What is the new market equilibrium quantity? What is the price that consumers pay? What is the price producers get? What is the tax incidence on consumers? producers?arrow_forward
- Consider the demand curve as in tutorial 12 (question 1), qd = 240 - 3p, where q is the quantity demanded and p is the price. The supply curve is given by qs = p - 6. If a specific (or per-unit) tax of $20 is imposed on sellers, how much tax revenue does the government raise in this market? [Round to one decimal place in both your calculations and in your final answer; Note: both the supply curve and the tax are different from the tutorial question.]arrow_forwardConsider the supply and demand functions graphed below. Price 100 75 70 60 10 56 Supply Demand 20 Quantity Suppose a demand-side tax is imposed. As a result of the tax, the new equilibrium quantity is 5. What is the price paid by consumers? $60 What is the price received by producers? $ How much is the tax that was imposed? How much tax revenue is collected? Which side of the market pays more of the tax? This side of the market pays more of the tax because SA A 4 4) (arrow_forwardThe following graph represents the demand and supply for an imaginary good called a pinckney. 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.arrow_forward
- Given the following information QD = 240-5p QS = P Where QD is the quantity demanded, Qs is the quantity supplied and P is the price. Suppose that the government decides to impose a tax of $12 per unit on sellers in the market. Determine : 1: Sellers price after tax 2: Quantity after tax 3: Producer supply after tax 4: Tax Revenuearrow_forwardSuppose that the demand curve for wheat is and the supply curve is Producer surplus Q = 400-40p The government provides producers with a specific subsidy of s= $2 per unit. How do the equilibrium price and quantity change? The equilibrium price decreases by $1 and the equilibrium quantity increases by $40 units. (Enter numeric responses using real numbers rounded to two decimal places.) What effect does this tax (subsidy) have on consumer surplus, producer surplus, government revenue, welfare, and deadweight loss? Consumer surplus increases by $ 220. by $ Qs = 40p.arrow_forwardPrice P₂ P A H B E F Supply+tax K Or Q Consumer surplus before the tax Based on the figure above, characterize each of the following terms by their area. Assume P, is the equilibrium price, P₂ is the price consumers pay, and P2-tax is the price sellers charge. It may be helpful to take a picture of the figure to avoid having to scroll up and down. Producer surplus before the tax Economic surplus before the tax Consumer surplus after the tax Producer surplus after the tax Tax revenue from consumers Supply Tax revenue from producers Quantity [Choose] [Choose] [Choose] [Choose] [Choose] [Choose] [Choose] varrow_forward
- Do you think profit could be maintained if the tax burden were simply passed on to the consumers in the form of higher selling price? How will this affect sales? Explain.arrow_forwardThe market for soft drinks is perfectly competitive. Assume that the supply of soft drinks is point elastic and upward sloping. The government imposes a consumer tax on soft drinks. If point elasticity of demand is inelastic, is the deadweight loss generated by the tax higher or lower relative to where the point elasticity of demand is elastic? Explain why.arrow_forwardSuppose the vertical distance between points S and R represents a tax in the market. Please answer the questions under the case of the tax. What area is the tax revenue to the government? What is the amount of the tax revenue? What area is the consumer surplus represented by? What is the amount of consumer surplus? What area is the producer surplus represented by? What is the amount of producer surplus? What area is the deadweight loss represented by? What is the amount of deadweight loss? What is the buyers’ share of tax burden? What is the sellers’ share of tax burden?arrow_forward
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