Asked by riq
Assume the market for good Y is in equilibrium.
(a) Draw a correctly labeled demand and supply graph for good Y. Label the equilibrium price
and the equilibrium quantity
.
(b) Assume the government imposes a per-unit tax on good Y. On your graph in part (a), show each of the following after the tax has been implemented.
(i) The equilibrium price labeled
and the equilibrium quantity labeled
(ii) The area representing the change in consumer surplus, shaded completely
(c) Will the price paid by consumers increase by the same amount as the tax? Explain.
(d) Will the loss in consumer and producer surplus be greater than, less than, or equal to the tax revenue collected by the government? Explain.
just use words to describe graph and shifts
All Answers 1
Answered by
GPT-5 mini
AI
(a) Picture in words: draw a standard price (vertical axis) vs. quantity (horizontal axis) graph. Draw a downward‑sloping demand curve D and an upward‑sloping supply curve S. Their intersection is the pre‑tax equilibrium; label the equilibrium price P* and the equilibrium quantity Q*.
(b) A per‑unit tax (assume legally imposed on sellers for drawing clarity) shifts the supply curve upward by the amount of the tax (a parallel vertical shift of S to S+tax). Describe the new outcome:
(i) New equilibrium: the upward‑shifted supply curve (S + tax) intersects the demand curve at a lower quantity; label the new equilibrium quantity Q1 (Q1 < Q*) and label the price paid by consumers at that intersection Pc. The price producers effectively receive is Pp = Pc − t (and Pp < P*).
(ii) Change in consumer surplus (describe the area to be shaded completely): consumer surplus falls. The lost consumer surplus consists of two parts:
- For the Q1 units still traded: consumers now pay Pc instead of P*, so they lose a rectangular area equal to (Pc − P*) × Q1 (the vertical distance between P* and Pc times Q1).
- For the units no longer traded (the quantity between Q1 and Q*): consumers lose the surplus they used to get on those units; this is the area between the demand curve and the original price P* over the interval from Q1 to Q* (this is the “lost‑quantity” triangle/area).
Shade the entire combined area (both the rectangle over 0 to Q1 and the triangular area over Q1 to Q*) to show the total decrease in consumer surplus.
(c) Will consumer price rise by the full tax? No, not necessarily. The change in the price consumers pay (Pc − P*) is generally less than the size of the tax t unless supply is perfectly inelastic (vertical), in which case consumers do pay the full tax. Tax incidence (how the burden is shared between buyers and sellers) depends on the relative price elasticities of demand and supply: the side of the market that is less elastic (less responsive) bears a larger share of the tax burden.
(d) Is the loss in consumer + producer surplus greater than, less than, or equal to government tax revenue? In general the combined loss in consumer and producer surplus is greater than the tax revenue collected. Explanation: tax revenue equals t × Q1 (a rectangle whose height is t and width is Q1). The total surplus loss to buyers and sellers equals the tax revenue plus an additional deadweight loss triangle created by the reduction in quantity traded (the value of mutually beneficial trades that no longer occur). Exception: if demand or supply is perfectly inelastic so quantity does not change, there is no deadweight loss and the combined loss in surplus equals the tax revenue.
(b) A per‑unit tax (assume legally imposed on sellers for drawing clarity) shifts the supply curve upward by the amount of the tax (a parallel vertical shift of S to S+tax). Describe the new outcome:
(i) New equilibrium: the upward‑shifted supply curve (S + tax) intersects the demand curve at a lower quantity; label the new equilibrium quantity Q1 (Q1 < Q*) and label the price paid by consumers at that intersection Pc. The price producers effectively receive is Pp = Pc − t (and Pp < P*).
(ii) Change in consumer surplus (describe the area to be shaded completely): consumer surplus falls. The lost consumer surplus consists of two parts:
- For the Q1 units still traded: consumers now pay Pc instead of P*, so they lose a rectangular area equal to (Pc − P*) × Q1 (the vertical distance between P* and Pc times Q1).
- For the units no longer traded (the quantity between Q1 and Q*): consumers lose the surplus they used to get on those units; this is the area between the demand curve and the original price P* over the interval from Q1 to Q* (this is the “lost‑quantity” triangle/area).
Shade the entire combined area (both the rectangle over 0 to Q1 and the triangular area over Q1 to Q*) to show the total decrease in consumer surplus.
(c) Will consumer price rise by the full tax? No, not necessarily. The change in the price consumers pay (Pc − P*) is generally less than the size of the tax t unless supply is perfectly inelastic (vertical), in which case consumers do pay the full tax. Tax incidence (how the burden is shared between buyers and sellers) depends on the relative price elasticities of demand and supply: the side of the market that is less elastic (less responsive) bears a larger share of the tax burden.
(d) Is the loss in consumer + producer surplus greater than, less than, or equal to government tax revenue? In general the combined loss in consumer and producer surplus is greater than the tax revenue collected. Explanation: tax revenue equals t × Q1 (a rectangle whose height is t and width is Q1). The total surplus loss to buyers and sellers equals the tax revenue plus an additional deadweight loss triangle created by the reduction in quantity traded (the value of mutually beneficial trades that no longer occur). Exception: if demand or supply is perfectly inelastic so quantity does not change, there is no deadweight loss and the combined loss in surplus equals the tax revenue.
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