Chapter 8.pdf - < Back to Assignment Attempts 2 Average 2 2 1 Understanding the implications of taxes on welfare The following graph represents the

Chapter 8.pdf - < Back to Assignment Attempts 2 Average 2 2...

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Unformatted text preview: < Back to Assignment Attempts: 2 - Average: 2 / 2 - 1. Understanding the implications of taxes on welfare The following graph represents the demand and supply for an imaginary good called a pinckney. The black point (plus symbol) indicates the pre-tax equilibrium. Suppose the government has just decided to impose a tax on this market; the grey points (star symbol) indicate the after-tax scenario. Demand PRICE (Dollars per pinckney) Supply A 11.00 B C D E 9.00 7.00 F 14 18 QUANTITY (Pinckneys) Complete the following table, given the information presented on the graph. Result Value Equilibrium quantity after tax 14.0 Price consumers pay after tax $11.00 Per-unit tax $4.00 Points: Explanation: 1/1 Close Explanation Before the tax is implemented, the equilibrium price and quantity occur at the intersection of the demand and the supply curves. Therefore, the price consumers pay and producers receive before the tax must be $9.00, and the equilibrium quantity of pinckneys is 18. After the tax is paid, the top grey star ($11.00) indicates the price consumers pay, whereas the bottom star ($7.00) indicates the price sellers i B th it t t b th diff b t th t i it i lt I th d th Per-unit tax $4.00 Points: Explanation: 1/1 Close Explanation Before the tax is implemented, the equilibrium price and quantity occur at the intersection of the demand and the supply curves. Therefore, the price consumers pay and producers receive before the tax must be $9.00, and the equilibrium quantity of pinckneys is 18. After the tax is paid, the top grey star ($11.00) indicates the price consumers pay, whereas the bottom star ($7.00) indicates the price sellers receive. Because the per-unit tax must be the difference between these two prices, it is equal to . In other words, the tax of $4.00 per unit drives a wedge between the price paid by consumers and received by sellers. This, in turn, decreases the equilibrium quantity from 18 to 14 pinckneys. Notice that the net result is the same, regardless of whether the tax is levied on consumers or producers: Consumers pay $11.00 per unit, and producers receive $7.00 after the tax is paid to the government. The only difference is what price is paid in the store, often called the retail price. If the tax is levied on producers, the retail price is $11.00 per unit because the producers will have to send the $4.00 per unit to the government; but if it’s levied on consumers, the retail price is $7.00 per unit because the consumers have the responsibility of paying the tax. In the following table, indicate which of the previous graph’s areas corresponds to each concept. Check all that apply. Concept A B C D E F Consumer surplus after the tax is imposed Tax revenue after the tax is imposed Producer surplus before the tax is imposed Points: Explanation: 1/1 Close Explanation Consumer surplus is the difference between a buyer’s willingness to pay and the price the buyer actually pays. Graphically, consumer surplus is the area above the price paid by consumers, below the demand curve, and to the left of the equilibrium quantity. Before the tax, areas form consumer surplus; however, after the tax, only area A represents consumer surplus due to an increase in the price paid by consumers and a decrease in the equilibrium quantity. Producer surplus is the difference between the price a seller actually receives for an item and the lowest price at which the seller would be willing to provide the item. Graphically, producer surplus is the area below the price received by producers, above the supply curve, and to the left of the equilibrium quantity. Before the tax, areas form producer surplus; however, after the tax, only area F represents producer surplus due to a decrease in the price received by producers and a decrease in the equilibrium quantity. Tax revenue is the per-unit tax multiplied by the equilibrium quantity after the tax is implemented. Visually, total tax revenue is represented by a rectangle extending from the vertical axis to the equilibrium quantity of 14 pinckneys and from the price sellers receive ($7.00) to the price consumers pay ($11.00), as shown by areas . Finally, deadweight loss is the loss in total welfare that results from the tax. Graphically, the deadweight loss is represented by the triangle between the supply curve and the demand curve and between the quantities of 14 pinckneys and 18 pinckneys, the combination of areas The following graphs and table summarize the results: . Points: Explanation: 1/1 Close Explanation Consumer surplus is the difference between a buyer’s willingness to pay and the price the buyer actually pays. Graphically, consumer surplus is the area above the price paid by consumers, below the demand curve, and to the left of the equilibrium quantity. Before the tax, areas form consumer surplus; however, after the tax, only area A represents consumer surplus due to an increase in the price paid by consumers and a decrease in the equilibrium quantity. Producer surplus is the difference between the price a seller actually receives for an item and the lowest price at which the seller would be willing to provide the item. Graphically, producer surplus is the area below the price received by producers, above the supply curve, and to the left of the equilibrium quantity. Before the tax, areas form producer surplus; however, after the tax, only area F represents producer surplus due to a decrease in the price received by producers and a decrease in the equilibrium quantity. Tax revenue is the per-unit tax multiplied by the equilibrium quantity after the tax is implemented. Visually, total tax revenue is represented by a rectangle extending from the vertical axis to the equilibrium quantity of 14 pinckneys and from the price sellers receive ($7.00) to the price consumers pay ($11.00), as shown by areas . Finally, deadweight loss is the loss in total welfare that results from the tax. Graphically, the deadweight loss is represented by the triangle between the supply curve and the demand curve and between the quantities of 14 pinckneys and 18 pinckneys, the combination of areas The following graphs and table summarize the results: Before Tax After Tax Demand Demand Supply PRICE (Dollars per pinckney) PRICE (Dollars per pinckney) Supply A 11.00 9.00 7.00 B C D E F 14 18 Before Tax After Tax A Producer Surplus F N/A Deadweight Loss N/A 9.00 7.00 B C D E F QUANTITY (Pinckneys) Consumer Surplus Tax Revenue 11.00 14 18 QUANTITY (Pinckneys) Concept A . Consumer surplus is the difference between a buyer’s willingness to pay and the price the buyer actually pays. Graphically, consumer surplus is the area above the price paid by consumers, below the demand curve, and to the left of the equilibrium quantity. Before the tax, areas form consumer surplus; however, after the tax, only area A represents consumer surplus due to an increase in the price paid by consumers and a decrease in the equilibrium quantity. Producer surplus is the difference between the price a seller actually receives for an item and the lowest price at which the seller would be willing to provide the item. Graphically, producer surplus is the area below the price received by producers, above the supply curve, and to the left of the equilibrium quantity. Before the tax, areas form producer surplus; however, after the tax, only area F represents producer surplus due to a decrease in the price received by producers and a decrease in the equilibrium quantity. Tax revenue is the per-unit tax multiplied by the equilibrium quantity after the tax is implemented. Visually, total tax revenue is represented by a rectangle extending from the vertical axis to the equilibrium quantity of 14 pinckneys and from the price sellers receive ($7.00) to the price consumers pay ($11.00), as shown by areas . Finally, deadweight loss is the loss in total welfare that results from the tax. Graphically, the deadweight loss is represented by the triangle between the supply curve and the demand curve and between the quantities of 14 pinckneys and 18 pinckneys, the combination of areas The following graphs and table summarize the results: Before Tax After Tax Demand Demand Supply PRICE (Dollars per pinckney) PRICE (Dollars per pinckney) Supply A 11.00 9.00 7.00 B C D E F 14 18 Before Tax Producer Surplus F Deadweight Loss N/A 7.00 B C D E F After Tax A N/A 9.00 QUANTITY (Pinckneys) Consumer Surplus Tax Revenue 11.00 14 18 QUANTITY (Pinckneys) Concept A Try Another Version Continue . < Back to Assignment Attempts: 2.7 - Average: 2.7 / 3 - 2. Taxes and welfare Consider the market for commercial fans. The following graph shows the demand and supply for commercial fans before the government imposes any taxes. First, use the black point (plus symbol) to indicate the equilibrium price and quantity of commercial fans in the absence of a tax. Then use the green point (triangle symbol) to shade the area representing total consumer surplus (CS) at the equilibrium price. Next, use the purple point (diamond symbol) to shade the area representing total producer surplus (PS) at the equilibrium price. Your Answer Correct Answer Before Tax Demand 200 180 Equilibrium PRICE (Dollars per fan) 160 140 Consumer Surplus 120 100 Supply 80 Producer Surplus 60 40 20 0 0 10 20 30 40 50 60 70 QUANTITY (Fans) 80 90 100 Points: Explanation: 1/1 Close Explanation The equilibrium price and quantity occur at the intersection of the demand and supply curves. Therefore, $120 per fan represents the equilibrium price, and 40 commercial fans represents the equilibrium quantity. Consumer surplus is the difference between the price a buyer is willing to pay and the price the buyer actually pays. The demand curve represents buyers' willingness to pay, and in the market for commercial fans, buyers pay the equilibrium price of $120 per fan. As a result, consumer surplus can be depicted graphically as the triangular area below the demand curve, above the equilibrium price, and to the left of the equilibrium quantity. Producer surplus is the difference between the price a seller receives and the minimum price the seller would be willing to accept. In the market for commercial fans, sellers receive the equilibrium price, and the supply curve indicates the price they would be willing to accept. Graphically, producer surplus is the triangular area above the supply curve, below the equilibrium price, and to the left of the equilibrium quantity. Points: Explanation: 1/1 Close Explanation The equilibrium price and quantity occur at the intersection of the demand and supply curves. Therefore, $120 per fan represents the equilibrium price, and 40 commercial fans represents the equilibrium quantity. Consumer surplus is the difference between the price a buyer is willing to pay and the price the buyer actually pays. The demand curve represents buyers' willingness to pay, and in the market for commercial fans, buyers pay the equilibrium price of $120 per fan. As a result, consumer surplus can be depicted graphically as the triangular area below the demand curve, above the equilibrium price, and to the left of the equilibrium quantity. Producer surplus is the difference between the price a seller receives and the minimum price the seller would be willing to accept. In the market for commercial fans, sellers receive the equilibrium price, and the supply curve indicates the price they would be willing to accept. Graphically, producer surplus is the triangular area above the supply curve, below the equilibrium price, and to the left of the equilibrium quantity. Suppose the government imposes an excise tax on commercial fans. The black line on the following graph shows the tax wedge created by a tax of $40 per fan. First, use the tan quadrilateral (dash symbols) to shade the area representing tax revenue. Next, use the green point (triangle symbol) to shade the area representing total consumer surplus after the tax. Then, use the purple point (diamond symbol) to shade the area representing total producer surplus after the tax. Finally, use the black point (plus symbol) to shade the area representing deadweight loss. Your Answer Correct Answer After Tax Demand 200 180 Tax Revenue PRICE (Dollars per fan) 160 140 120 Consumer Surplus Tax Wedge 100 Supply 80 Producer Surplus 60 40 Deadweight Loss 20 0 0 10 20 30 40 50 60 70 QUANTITY (Fans) 80 90 100 Points: Explanation: 1/1 Close Explanation The tax of $40 per fan reduces the quantity of commercial fans sold from 40 to 30. Buyers will purchase 30 commercial fans at a price of $140 First, use the tan quadrilateral (dash symbols) to shade the area representing tax revenue. Next, use the green point (triangle symbol) to shade the area representing total consumer surplus after the tax. Then, use the purple point (diamond symbol) to shade the area representing total producer surplus after the tax. Finally, use the black point (plus symbol) to shade the area representing deadweight loss. Your Answer Correct Answer After Tax Demand 200 180 Tax Revenue PRICE (Dollars per fan) 160 140 120 Consumer Surplus Tax Wedge 100 Supply 80 Producer Surplus 60 40 Deadweight Loss 20 0 0 10 20 30 40 50 60 70 QUANTITY (Fans) 80 90 100 Points: Explanation: 1/1 Close Explanation The tax of $40 per fan reduces the quantity of commercial fans sold from 40 to 30. Buyers will purchase 30 commercial fans at a price of $140 per fan, while sellers will receive only $100 for these 30 commercial fans. The tax drives a wedge between the amount paid by consumers ($140 per fan) and the amount received by sellers ($100 per fan). The height of this tax wedge ($40) forms the height of the tax revenue rectangle. The width of the revenue rectangle goes from the vertical axis to the after-tax equilibrium quantity of commercial fans, given the $40 tax (30 fans). The area of the rectangle represents the overall tax revenue the government receives. Graphically, consumer surplus is the area below the demand curve, above the price consumers pay, and to the left of the equilibrium quantity after the tax. Producer surplus is the area above the supply curve, below the price sellers receive, and to the left of the equilibrium quantity after the tax. The deadweight loss is represented by the triangular area on the graph to the right of the tan tax wedge, above the supply curve, below the demand curve, and to the left of the equilibrium quantity without the tax. This area represents the loss of total welfare caused by the tax. While the government recovers some of the lost consumer surplus and producer surplus generated by the tax, the deadweight loss area represents the lost welfare that is not recouped in the form of tax revenue. The loss occurs because the tax prevents some mutually beneficial transactions that happened previously from occurring. In particular, at every quantity of fans from 30 to 40, sellers will need to receive a price above pretax buyers' willingness to pay; thus, these transactions do not occur. Complete the following table by using the previous graphs to determine the values of consumer and producer surplus before the tax, and consumer surplus, producer surplus, tax revenue, and deadweight loss after the tax. Complete the following table by using the previous graphs to determine the values of consumer and producer surplus before the tax, and consumer surplus, producer surplus, tax revenue, and deadweight loss after the tax. Note: You can determine the areas of different portions of the graph by selecting the relevant area. Before Tax After Tax (Dollars) (Dollars) Consumer Surplus 1,600 900 Producer Surplus 1,600 900 Tax Revenue 0 120 Deadweight Loss 0 100 1,200 200 Points: Explanation: 0.67 / 1 Close Explanation Before the tax, the equilibrium price of a commercial fan was $120 and the equilibrium quantity of fans sold was 40. The area of the consumer surplus triangle and producer surplus triangle was equal to the following: After the government imposed the tax, buyers bought fewer fans (30) at a higher price per fan ($140), and sellers sold fewer fans (30) at a lower price per fan ($100). The area of both the consumer surplus and producer surplus triangles decreases: After the government imposed the tax, buyers bought fewer fans (30) at a higher price per fan ($140), and sellers sold fewer fans (30) at a lower price per fan ($100). The area of both the consumer surplus and producer surplus triangles decreases: Therefore, the sum of consumer and producer surplus decreased from $3,200 before the tax to $1,800 after the tax, causing a loss in total welfare. However, the government recouped some of the lost welfare in the form of tax revenue: The sum of consumer surplus, producer surplus, and tax revenue is $3,000, which represents total welfare in the market after the tax. It is still $200 less than the total surplus in the pretax market. Therefore, the $200 loss of surplus represents the deadweight loss of the tax. Try Another Version Continue < Back to Assignment 2.5 Attempts: 4 4 Average: 3.5 / 4 3. Relationship between tax revenues, deadweight loss, and demand elasticity The government is considering levying a tax of $30 per unit on suppliers of either jeans or allergy medication. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for jeans is shown by allergy medication is shown by (on the first graph), and the demand for (on the second graph). Suppose the government taxes jeans. The following graph shows the annual supply and demand for this good. It also shows the supply curve ( ) shifted up by the amount of the proposed tax ($30 per pair). On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for jeans. Then use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. Your Answer Correct Answer Jeans Market 60 55 S+Tax Supply 50 Tax Revenue PRICE (Dollars per pair) 45 40 Deadweight Loss 35 30 25 20 DJ 15 10 5 0 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Pairs) Points: 1/1 Instead, suppose the government taxes allergy medication. The following graph shows the annual supply and demand for this good, as well as the supply curve shifted up by the amount of the proposed tax ($30 per bottle). On the following graph, do for allergy medication the same thing you did previously on the graph for jeans. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for allergy medication. Then, use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. Your Answer Allergy Medication Market Correct Answer Points: 1/1 Instead, suppose the government taxes allergy medication. The following graph shows the annual supply and demand for this good, as well as the supply curve shifted up by the amount of the proposed tax ($30 per bottle). On the following graph, do for allergy medication the same thing you did previously on the graph for jeans. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for allergy medication. Then, use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. Your Answer Correct Answer Allergy Medication Market 60 55 S+Tax Supply 50 Tax Revenue PRICE (Dollars per bottle) 45 40 Deadweight Loss 35 30 25 20 15 10 5 DA 0 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Bottles) Points: Explanation: The $30 tax reduces the equilibrium quantity sold in the market from 300 pairs to 50 pairs (the intersection of the 1/1 Close Explanation and curves). At the after-tax equilibrium quantity, the price buyers pay is $35 per pair, and the price sellers receive is $5 per pair. The difference between the two values represents the $30 tax that the government receives from the seller. Tax revenue is the per-unit tax...
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