5. Consider the following supply and demand for hats. Suppose there is a $3 tax per hat. This exercise will demonstrate that the effect of the tax does not depend on who is required to actually pay the tax.

Price (price paid for b; price received for

c) Supply Demand Supply with $3 tax on sellers (part

b) Demand with $3 tax on buyers (part

c) $0 0 120 $1 10 100 $2 20 80 $3 30 60 $4 40 40 $5 50 20 $6 60 0

a. Sketch the supply and demand curves. What would the equilibrium quantity and price be if there were no tax?

b. Now, assume the $3 tax is levied on sellers; for example, when the price paid is $4, the sellers will receive $1 per unit and supply 10 hats. Complete the new column and add the new supply curve to your graph.

c. Repeat, but with tax instead levied on the buyers. What is the equilibrium price paid and price received?

d. Regardless of how the tax is levied, what fraction of the $3 tax (tax incidence) is paid by the buyers?