Suppose a $4 tax is imposed on sellers in the market shown in the graph. The tax-inclusive price (or after-tax price) paid by the buyer will be _______ and the tax-inclusive price (or after-tax price) received by the seller will be _______.

Question

Quizplus · Accepted Answer

When a tax is imposed on sellers, the supply curve shifts vertically upwards by the amount of the tax. In this case, the supply curve shifts from S1 to S2.

The new equilibrium point is where the new supply curve (S2) intersects with the original demand curve (D).

Before the tax, the equilibrium price was $8 and the equilibrium quantity was 6 units. After the tax, the new equilibrium price will be higher than $8 and the equilibrium quantity will be lower than 6 units.

The tax-inclusive price paid by the buyer will be higher than the pre-tax price by the amount of the tax. So, the new equilibrium price will be $10 (=$8 + $2 tax).

The tax-inclusive price received by the seller will be lower than the pre-tax price by the amount of the tax. The seller will receive $6 (=$8 - $2 tax) after paying the $4 tax.

Therefore, the best choice is D.

Suppose a $4 Tax Is Imposed on Sellers in the Market