Quiz Ch8.

Cost of taxation
1. The government places a tax on the purchase of socks.
a. Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following
areas both before and after the imposition of the tax: total spending by consumers, total revenue for producers,
and government tax revenue. Spending an revenues will go down, TR will appear
b. Does the price received by producers rise or fall? Can you tell whether total receipts for producers rise or
fall? Explain. Fall, fall
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. Total spending unknown, CS falls
2. Suppose that a market is described by the following supply and demand equations: QS = 2P; QD = 600 – P.
a) What is equilibrium price and quantity? p=200, q=400
b) Suppose that a tax of $3 is placed on buyers, so the new demand equation is QD = 600 - (P + 3). What will be new price
and quantity? P=199, q=198
c) What will be the tax revenues and deadweight loss? TR=198*3=594. DwL= 3
d) How the imposition of the tax will change consumer surplus? Before: 800, after:792

Quiz Ch8. Cost of taxation

1. The government places a tax on the purchase of t-shirts.
a. Illustrate the effect of this tax on equilibrium price and quantity in the t-shirts market. Identify the following
areas both before and after the imposition of the tax: total spending by consumers, total revenue for producers,
and government tax revenue. Spending an revenues will go down, TR will appear
b. Does the price received by producers rise or fall? Can you tell whether total receipts for producers rise or
fall? Explain. Fall, fall
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. Total spending unknown, CS falls
2. Suppose that a market is described by the following supply and demand equations: QS = 2P; QD = 600 – P.
a) What is equilibrium price and quantity? p=200, q=400
b) Suppose that a tax of $3 is placed on seller, What will be new market price (including tax) and quantity? P=199, q=198
c) What will be the tax revenues and deadweight loss? TR=198*3=594. DwL= 3
d) How the imposition of the tax will change consumer surplus? Before: 800, after:792