Figure 4-11

-Refer to Figure 4-11. Suppose the market is initially in equilibrium at price P₁ and then the government imposes a tax on every unit sold. Which of the following statements best describes the impact of the tax?

Question

Figure 4-11
 
-Refer to Figure 4-11. Suppose the market is initially in equilibrium at price P₁ and then the government imposes a tax on every unit sold. Which of the following statements best describes the impact of the tax?

Quizplus · Accepted Answer

The imposition of the tax causes the supply curve to shift upward by the amount of the tax. As a result, the equilibrium price increases to P₂. With the new price, consumers demand less at every price level, and producers supply less. The amount of the tax is thus shared between buyers and sellers. 
If the demand curve is D₁, the tax burden is distributed evenly between buyers and sellers. However, when the demand curve is D₂, consumers' demand is more inelastic, so they bear a greater share of the tax burden. Thus, choice C is correct.

Figure 4-11 -Refer to Figure 4-11. Suppose the Market Is Initially in Market