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To raise funds aimed at providing more support for

public schools,astate government has just imposed

aunit excise tax equal to\(4for each monthly unit

of wireless phone services sold by each company

operating in the state.The following diagram

depicts the positions of the demand and supply

curves for wireless phone services before the unit

the excise tax was imposed. Use this diagram to deter

mine the position of the new market supply curve

now that the tax hike has gone into effect.

a.Does imposing the \)4-per-month unit excise tax

cause the market price of wireless phone ser

vices to rise by\(4per month?Why or why not?

b.What portion of the \)4-per-month unit excise

tax is paid by consumers? What portion is paid

by providers of wireless phone services?

Step by step solution

01

Step1. Given information

A unit excise tax of $4 imposed for each monthly unit of wireless phone services.

02

Step2. a. Explanation

Yes, the prices will increase as the $4 increase is added and the price adjusts to it. As a result of this, the wireless phone service becomes expensive and the equilibrium quantity is bound to reduce.

03

Step3. b. Explanation

The entire increase is borne by the consumers as it is an excise duty. It is levied upon the consumers because the suppliers can't accommodate the price change. They will instead reduce the supply such that to match the new price which will be equal to the sum of initial equilibrium price and the excise duty.

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