3 . Effect of a tax on buyers and sellers

The following graph shows the weekly market for handbags in some hypothetical economy. Suppose the government levies a tax of $11.60 per bag. The tax places a wedge between the price buyers pay and the price sellers receive.

A graph plots supply and demand for handbags, with price in dollars per bag ranging from 0 to 200 in increments of 5 on the y-axis and quantity in bags of handbags ranging from 0 to 500 in increments of 50 on the x-axis. A downward sloping straight line labeled demand passes through the points (250, $25.00) and (210, $35.00); a positive sloping straight line labeled supply passes through the points (250, $25.00) and (210, $23.40). The curves intersect at (250, $25.00). A black vertical line labeled tax wedge connects the supply and demand curves to the left of their intersection via points (210, $35.00) along the demand curve and (210, $23.40) along the supply curve. The demand curve is steeper than the supply curve.

05010015020025030035040045050050454035302520151050PRICE (Dollars per bag)QUANTITY (Bags of handbags)Tax WedgeDemandSupply

Complete the following table by filling in the quantity sold, the price buyers pay, and the price sellers receive before and after the tax.

	Quantity	Price Buyers Pay	Price Sellers Receive
(Bags of handbags)	(Dollars per bag)	(Dollars per bag)
Before Tax
After Tax

Using your answers from the previous table, calculate the tax burden that falls on buyers and on sellers, respectively, and calculate the price elasticity of demand and supply over the relevant ranges using the midpoint method. Enter your results in the following table.

	Tax Burden	Elasticity
(Dollars per bag)
Buyers
Sellers

The tax burden falls more heavily on the side of the market that is elastic.

Four Quiz 50 45 40 35 Supply 30 Tax Wedge PRICE (Dollars per bag) 25 20 15 10 5 Demand 50 100 150 200 250 300 350 400 450 500 QUANTITY (Bags of handbags)