Suppose that a specific tax of $3 is imposed on consumers of bread.The bread market supply is Qs = 10 + 0.5P and the bread market demand is Qd = 100-P.What is the consumers' tax burden?
A) Consumers' tax burden is $1.30.
B) Consumers' tax burden is $1.00.
C) Consumers' tax burden is $1.50.
D) Consumers' tax burden is $0.30

Question

Quizplus · Accepted Answer

To find the consumer tax burden, we need to calculate the price increase that results from the tax. The tax is $3, so the price that consumers pay will increase by $3. 
To find the new equilibrium price and quantity, we need to subtract the tax from the demand equation: 
Qd = 100 - P - 3
And set it equal to the supply equation: 
Qs = 10 + 0.5P

Solving for P gives us: 
100 - P - 3 = 10 + 0.5P 
Simplifying: 
90 = 1.5P 
P = 60

So the new equilibrium price is $60, which is a $3 increase from the original price of $57. Therefore, the consumer tax burden is $3 - $2 = $1. 
The reason we subtract $2 instead of $3 is that the producers also share in the burden of the tax, and they will reduce their price by some amount to offset the tax. In this case, the producers are absorbing $2 of the tax, leaving $1 for the consumers to pay.

Suppose That a Specific Tax of $3 Is Imposed on Consumers