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Chapter 6: Q. 6.9 (page 140)

The following information applies to the market for

a particular item in the absence of a unit excise tax:

a.According to the information in the table,in the

absence ofaunit excise tax,what is the market

price?What is the equilibrium quantity?

b.Suppose that the government decides to subject

producers of this item toaunit excise tax equal

to$2per unit sold.What is the new market

price?What is the new equilibrium quantity?

c.What portion of the tax is paid by producers?

What portion of the tax is paid by consumers?

Short Answer

Expert verified

Equilibrium price initially is $7 and quantity is 125 units.

Price will increase and quantity fall.

Step by step solution

01

Step1. Given information

Excise duty of $2 is charged by the government.

02

Step2. a Explanation

The equilibrium initially is at Qty demanded = Qty supplied = 125 at $7.

03

Step3. b. c. Explanation

Upon adding an excise duty of $2, price in market shall increase as the suppliers charge higher price to recover the lost profit due to increased cost of production. The supply however declines and so does the new equilibrium quantity.

Since it is an excise duty levied on producers, but they charge higher to recover lost profit, hence consumers face the burden of duty.

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Most popular questions from this chapter

The sales tax rate applied to all purchases within a state was 0.04 (4 percent) throughout 2016 but increased to 0.05 (5 percent) during all of 2017. The state government collected all taxes due, but its tax revenues were equal to $40 million each year. What happened to the sales tax base between 2016 and 2017? What could account for this result?

Suppose that a state has increased its sales tax rate every other year since 2009. Assume the state collected all sales taxes that residents legally owed. The table below summarizes its experience. What were total taxable sales in this state during each year displayed in the table?

Consider Figure 6-3. Suppose that the government raises its sales tax from 4 percent to 6 percent. Does the direction of the effect on government's tax revenue indicated by the figure's dynamic tax analysis accord with the prediction that would have been forthcoming from static tax analysis? Explain briefly.

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?

Consider Figure 6-3. Suppose that the government raises its sales tax from 6 percent to 8 percent. Are the predictions of static analysis and dynamic tax analysis in agreement on the direction of the change of government's tax revenue? Explain briefly.
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