Problems and Applications
1. a. Figure 7 illustrates the market for socks and the effects of the tax. Without a tax, the
equilibrium quantity would be Q
, the equilibrium price would be P
, total spending by consumers
equals total revenue for producers, which is P
, which equals area B + C + D + E + F, and
government revenue is zero. The imposition of a tax places a wedge between the price buyers
, and the price sellers receive, P
, where P
+ tax. The quantity sold declines to Q
Now total spending by consumers is P
, which equals area A + B + C + D, total revenue for
producers is P
, which is area C + D, and government tax revenue is Q
x tax, which is area
A + B.
b. Unless supply is perfectly elastic or demand is perfectly inelastic, the price received by
producers falls because of the tax. Total receipts for producers fall, because producers lose
revenue equal to area B + E + F.
c. The price paid by consumers rises, unless demand is perfectly elastic or supply is perfectly
inelastic. Whether total spending by consumers rises or falls depends on the price elasticity of
demand. If demand is elastic, the percentage decline in quantity exceeds the percentage
increase in price, so total spending declines. If demand is inelastic, the percentage decline in
quantity is less than the percentage increase in price, so total spending rises. Whether total
consumer spending falls or rises, consumer surplus declines because of the increase in price and
reduction in quantity.
2. a. As Figure 6 shows, an increase in the demand for land will raise the price of land, but leave
the equilibrium quantity unchanged. Thus, the revenue of land owners will rise.