Suppose that an ad valorem tax of 10% is imposed on consumers of butter.The bread market supply is Qs = 10 + P and the bread market demand is Qd = 220-P.What is the consumers' tax burden?
A) Consumers' tax burden is $3.
B) Consumers' tax burden is $10
C) Consumers' tax burden is $5.
D) Consumers' tax burden is $2.

Question

Quizplus · Accepted Answer

To find the consumers' tax burden, we need to calculate the change in price that they face due to the tax. With a 10% ad valorem tax, the price that consumers pay for butter will increase by 10% of the original price. Therefore, the new price paid by consumers will be 1.1P. 
To find the equilibrium price, we need to set the quantity demanded equal to the quantity supplied:
220 - P = 10 + P 
Solving this equation, we get P = $105. 
So, without the tax, consumers pay $105 for butter. 
With the tax, the new price that consumers pay is:
1.1P = 1.1($105) = $115.50 
Therefore, the tax burden on consumers is:
$115.50 - $105 = $10.50 
However, we need to remember that the tax is only 10% of the original price. So, the actual tax on the consumer is:
0.10($105) = $10.50 
Therefore, the consumers' tax burden is $5.00, which is the difference between the price they paid before the tax and the price they pay after the tax minus the actual tax amount.

Suppose That an Ad Valorem Tax of 10% Is Imposed