Q1: Suppose the government is to impose a tax of $1 per unit on the transaction of the good. We don't know yet whom the government will impose the tax on. We do know that the tax will generate a 31 wedge between the net price consumers pay and the net price producers receive. Price The 51 tax is shown here as the red line. To allow for the $1 wedge between consumer and producer prices, one tucks the red line between the demand and supply curves. There are two places In the diagram thatthe red line will fit: one istothe leftofthecurrent equilibrium point [0), and the other isto the right. The choice should besuch that the net price consumer pay is greaterthanmenetprlceproduoersrecehreby exactly $1. There has to be 51 left over for the gavernment to collect as tax. (ii) From there, identify on the diagram the net price consumers pay and the net price producers receive. Denote the two prices by Po and Pp, respectively. (iii) Given (ii), who bear the tax burden? Consumers? Producers? Both? Answer: (iv) Who bears more of the tax burden? Consumers? Producers? Equally? Answer: (v) In the next chapter, you will learn that the way the tax burden is shared (in a competitive market) is determined by the \"steepness\" of the supply and demand curves. (vi) 0n the diagram, identify the equilibrium quantity under the tax regime. Denote it by Q\". Q2: Taxing the Consumers: As in Q3, the government is to impose a tax of $1 per unit on the transaction of the good. But now we know that the tax is to be imposed on consumers. Price Supply = MC With a consumer tax of $1 per unit, the MB curve will shift down by $1. This is because the benefit from consumption is reduced by $1 due to the consumption tax. $5 Demand = MB Quantity (ii) Identify the new equilibrium point and denote it as Q on the diagram. (iii) From Q, identify the new equilibrium price and denote it as PP on the price axis. This is the price that consumers pay producers under this tax regime. Next, consumers will pay taxes! (iv) Starting at Point Q, draw a vertical dash line upwardly until it hits the original demand curve (i.e., the demand curve without tax). Denote that point as E. (v) Starting at Point E, draw a horizontal dash line toward the price axis and denote the associated price as P . This is the total price that consumers pay, which is the sum of the price consumers pay producers (PP) and the tax consumers pay Uncle Sam ($1). (vi) pc - PP = ? (A) A random number (B) The tax amount (C) $1 (D) Both Band Care correct. Answer:Q3: Taxing the Producers: Similar to Q4, the government is to impose a tax of$1 per unit on the transaction of the good. But, this time the taxis to be imposed on producers. Price WithaprothoertaxofSI perunmtheMC cum milshlft upbySl. 55 This is becauseiecostofproduction is increased by $1 due to the production tax. {ii} Identify the new equilibrium point and denote it as (l on the diagram. {iii} From 0, identify the new equilibrium price and denote it as Pc on the price axis. This is the price that consumers pay producers underthis tax regime. Next, producers will pay taxes. {iv} Starting at Point I], draw a vertical dash line downwardly until it hits the original supply curve [i.e., the supply curve without tax). Denote that point as E. {v} Starting at Point I, draw a horizontal dash line toward the price axis and denote the associated price as P". This is the net price that producers receive, which is the difference between the price received from consumers [Pi and the tax producers pay Uncle Sam {$1}. {vi} Pc-PP=? {A} A random number (B) The tax amount {Cl 51 {D} Both B and C are correct