Thos question comes from Gregory Mankiw Principles of Microeconomics fourth edition. I am not sure how to do this problem. Can you help me please.

Question

The government places a tax on the purchase of socks.

A. Illustrate the effect of the tax on equilibrium price and quantity in the sock market. ID the following areas both before and after the imposition of the tax: total spending by consumers, total revenue form producers, and government tax revenue.
B. Does the price received by producers rise or fall? Can you tell whether total spending by consumers rises or falls? Explain carefully. (Hint: Think about elasticity.) If total consumer spending falls, does consumer surplus rise? Explain.
C. Does the price paid by consumers rise or fall? Can you tell whether total spending by consumers rises or falls? Explain carefully. (Hint: Think about elasticity.) If total consumer spending falls, does consumer surplus rise? Explain.

Answer 1

Dont get confused by character of corporate equities (stocks). This is a simple supply and demand graph.

Draw a simple supply and demand curves for stocks find equilibriums for price (Po) and quantity (Qo). Total spending is Po*Qo.

Now shift the supply curve inward, reflecting the new tax. (How the supply curve shifts depends on the nature of the tax. Say the tax is x% of the selling price. Then, the old and new supply curve will look like a tilted V.)
Price paid (P*) will be the new equilibrium price. Q* will be the new equilibrium quantity. Using the ORIGINAL supply curve, find the price P^ associated with Q*; this will be the price received by sellers. The difference between P* and P^ is the per-unit tax.

Price received by sellers falls, (P^<Po). Price paid by buyers rises (P*>Po). If demand is inelastic, total spending by consumers rises. Consumer surplus definately falls, regardless of demand elasticities.

Answer 2

Uh... that's SOCKS not Stocks :)