Question

The graphs show the market for bags of potato chips, which is currently at an equilibrium price of $1.33 per bag and an equilibrium quantity of 5.33 million bags. Suppose that, in an attempt to lower blood pressure and reduce healthcare costs, the government imposes a $1.00 excise (or commodity) tax on potato chips Suppose the government levies this tax on manufacturers for each bag of potato chips they produce. Please shift the appropriate curve or curves to illustrate this 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Supply Demand 0 1234 5 6 78 9 10 Quantity (mllions of bags) What is the price paid per bag by consumers (Pc) with this new tax? What is the price received net of tax (Pp) per bag by producers with this new tax? Suppose the government, instead of levying the tax on producers, levies the tax on consumers for each bag of potato chips they purchase. Please shift the appropriate curve or curves to illustrate this 5.0 4.5 4.0 3.5

Answer 1

Graph 1.1 shows what happened to the supply/demand curve ifthe government levies S1.00 excise tax on manufacturers for each bag of potato chips they produce Graph 1.1 5 New Supply 3 Supply 2 Demand 1 2 0 3 4 5 7 8 10 Quantity Show the price paid per bag by consumers (Pc)with this new tax: The point where the demand and the new supply curves intersected each other is telling the S2 price paid by consumers with this new tax is Show the price received net of tax (Pp) per bag by producers with this new tax Price received net of tax (Pp) per bag by producers is calculated by subtracted tax from the price paid by the consumers is S1 (= $2 - $1) Price

Graph 1.2 shows what happened to the supply/demand curve if the govenment levies $1.00 on consumers for each bag of potato chips they purchase: excise tax Graph 1.2 5 4 3 New Demand Supply 2 Demand 5 7 0 2 3 4 6 8 9 10 Quantity Show the effective price paid per bag by cons (Pc)with this new tax C nsumers The point where the supply and the new demand curves intersected each other this price paid by consumers with this new tax is $ 1. The effective price paid by the consumers is the price received by the producers plus tax, ie., $2 Show the price received net of tax (Pp) per bag by producers with this new tax: The point where the new demand and supply curves intersect each other is telling the price received by the producer's net of tax is io - t Price