Question

Using the graph shown, in which the vertical distance between points A and B represents the tax in the market, answer the following questions. a. What was the equilibrium price and quantity in this market before the tax? b. What is the amount of the tax? c. How much of the tax will the buyers pay? d. How much of the tax will the sellers pay? e. How much will the buyer pay for the product after the tax is imposed? f. How much will the seller receive after the tax is imposed? As a result of the tax, what has happened to the level of market activity? Calculate the g. dead weight loss created by this tax. Interpret the dead weight loss. price 6000 8000 waxtity

Answer 1

a) Price is $8 and quantity is 8000 units

b) Tax size is 11 - 6 = $5 per unit

c) Buyers pay 11 - 8 = $3 per unit as tax

d) Sellers pay 8 - 6 = $2 per unit as tax

e) Buyers are paying $11 per unit after tax

f) Sellers receive $6 per unit after tax

g) Sales are dropped from 8000 units to 6000 units. DWL = efficiency loss to consumers + efficiency loss to producers = 0.5 x size of tax x reduction in quantity sold = 0.5*5*2000 = $5000