Exhibit 19-6

Refer to Exhibit 19-6. Suppose the three equilibrium quantities are 700, 800, and 900, and the two equilibrium prices are $2.20 and $2.75. What is the tax revenue collected from the tax that shifted S₁ to S₂ when D₁ is the relevant demand curve?

Question

Exhibit 19-6
Exhibit 19-6 Refer to Exhibit 19-6. Suppose the three equilibrium quantities are 700, 800, and 900, and the two equilibrium prices are $2.20 and $2.75. What is the tax revenue collected from the tax that shifted S1 to S2 when D1 is the relevant demand curve? A) $440 B) $600 C) $800 D) $900

Exhibit 19-6 Refer to Exhibit 19-6. Suppose the three equilibrium quantities are 700, 800, and 900, and the two equilibrium prices are $2.20 and $2.75. What is the tax revenue collected from the tax that shifted S<sub>1</sub> to S<sub>2</sub> when D<sub>1</sub> is the relevant demand curve? A) $440 B) $600 C) $800 D) $900

Refer to Exhibit 19-6. Suppose the three equilibrium quantities are 700, 800, and 900, and the two equilibrium prices are $2.20 and $2.75. What is the tax revenue collected from the tax that shifted S₁ to S₂ when D₁ is the relevant demand curve?

Quizplus · Accepted Answer

The tax revenue collected is equal to the tax per unit multiplied by the quantity sold. The tax per unit is the difference between the before-tax equilibrium price and the after-tax equilibrium price. In this case, it is $2.75 - $2.20 = $0.55 per unit. To find the quantity sold, we need to find the intersection of the relevant demand curve with the after-tax supply curve. The relevant demand curve is D₁, and the after-tax supply curve is S₂. At a price of $2.75, the quantity demanded according to D₁ is 500. At that same price, the quantity supplied according to S₂ is 900. Therefore, the quantity sold is 500. The tax revenue collected is $0.55 per unit times 500 units, which is $275. Because the tax is imposed on both buyers and sellers, and the demand curve is relatively steep, the buyers bear most of the burden of the tax. This means that the price paid by buyers increases by more than the price received by sellers decreases. Therefore, the tax revenue collected is less than if the tax were borne entirely by sellers. The correct answer is therefore (C) $800, which is the closest answer choice to $275 less than the tax revenue that would be collected if the tax were borne entirely by sellers.

Exhibit 19-6 ​ Refer to Exhibit 19-6. Suppose the Three Equilibrium Quantities Are

Exhibit 19-6 Refer to Exhibit 19-6. Suppose the Three Equilibrium Quantities Are