Question

7. Taxation - An algebraic approach Suppose the supply of a good is given by the equation 0= 360P – 360, and the demand for the good is given by the equation OP-840 - 120P. where quantity (Q) is measured in millions of units and price (P) is measured in dollars per unit. The government decides to levy an excise tax of $2.00 per unit on the good, to be paid by the seller. Calculate the value of each of the following, before the tax and after the tax, to complete the table that follows: 1. The equilibrium quantity produced 2. The equilibrium price consumers pay for the good 3. The price received by sellers Before Tax After Tax Equilibrium Quantity (Millions of units) Equilibrium Price per Unit Paid by Consumers Price per Unit Received by Sellers per unit of the good, and the tax incidence Given the information you calculated in the preceding table, the tax incidence on consumers is on producers is per unit of the good. The government receives in tax revenue from levying an excise tax of $2.00 per unit on this good. True or False: The price ultimately paid by the buyer (that is, the amount of money that the buyer pays including any applicable taxes) would have been different if the tax had been levied on buyers instead.

Answer 1

A-7) Before Tax: Q = 3601 - 360 Tax = 12 Q = 840 - 120P. Q = a. 360p - 360= 840-120p. 3601+12op= 84ot 360 480p = 1200 p - 2.5., . = 840-120x2.5 = 540 units. to s 5 a tttt o 36054 + X After Tax : a = 360(1-2) -360 = 360p 720-360. = 360p - logo OST 360P - logo=840-120p. Stop +12op= suot lodo 480P = 1920 p=4..Q=8360x4 -1080=360 units. Price paid by consumer = $4. brice received sellers - $4.82=82 - Before Tax After Tax 1) Equilibrium Quantity 540 2) Price paid by consumer 2.5 3) Price receined by sellers 2.5 u Tax Incidence on Consumers = 44-$2.5= $1.5. rij Tax Incidence on producers = $2.50 $2= 40.5. - Tax Revenue = 42X360= $720. True. 4 the tax was levied on buyer, then incidence would have been different 360