Chapter 9R, Problem 1FRQ

a)

To determine

Representation of equilibrium price and equilibrium quantity on the graph.

Explanation of Solution

Equilibrium price ($500) and equilibrium quantity (1000) would be represented on the graph as follows:

  

Economics Concept Introduction

Introduction: The quantity that balances the supply and demand is an equilibrium quantity and the price, where demand and supply are equal is called the equilibrium price.

b)

To determine

New equilibrium price and equilibrium quantity after tax

Answer to Problem 1FRQ

The new equilibrium price would be $480 and the equilibrium quantity would be $1000

Explanation of Solution

With the effects of the (tax $20) on the graph, the new equilibrium price and equilibrium quantity would be present as follows:

  

Here, the new equilibrium price would be

  $\begin{array}{l}=500-20\hfill \\ =480\hfill \\ \hfill \end{array}$

And, new equilibrium quantity would be the same which is $1000

Economics Concept Introduction

Introduction: The quantity that balances the supply and demand is an equilibrium quantity and the price, where demand and supply are equal is called the equilibrium price.

c)

To determine

The amount of tax revenue.

Answer to Problem 1FRQ

The amount of tax revenue would be $20,000.

Explanation of Solution

The amount of tax revenue would be:

  $\begin{array}{l}\text{Tax revenue = Quantity sold}\times \text{Tax per acre}\hfill \\ \text{ = 1000}\times \text{\$20}\hfill \\ \text{ = \$20,000}\hfill \end{array}$

Economics Concept Introduction

Introduction: Tax revenue is the earnings that are incurred by imposing a tax on goods and services.

d)

To determine

Deadweight loss

Answer to Problem 1FRQ

The deadweight loss would be $0.

Explanation of Solution

The amount of deadweight loss would be:

  $\begin{array}{l}\text{Deadweight loss }=0.5\times (P2-P1)\times (Q1-Q2)\hfill \\ =0.5(500-480)(1000-1000)\hfill \\ =\$0\hfill \end{array}$

Economics Concept Introduction

Introduction: When supply and demand are out of equilibrium due to market inefficiency, this is a situation of deadweight loss.

e)

To determine

The bearer of the burden of the tax.

Answer to Problem 1FRQ

Producers will bear the burden of the tax.

Explanation of Solution

Here, the elasticity of demand is greater than one, and the elasticity of supply is equal to zero. Therefore, producers bear the burden of this tax because the demand is more elastic than supply in this case.

Economics Concept Introduction

Introduction: The burden of tax lies on a person who is liable to pay taxes in a particular time period for buying or selling something or under a proportion of his/her total income.