- 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 $40.60 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 20 on the y-axis and quantity in bags of handbags ranging from 0 to 1000 in increments of 100 on the x-axis. A downward sloping straight line labeled demand passes through the points (500, $100.00) and (430, $105.60); a positive sloping straight line labeled supply passes through the points (500, $100.00) and (430, $65.00). The curves intersect at (500, $100.00). A black vertical line labeled tax wedge connects the supply and demand curves to the left of their intersection via points (430, $105.60) along the demand curve and (430, $65.00) along the supply curve. The supply curve is steeper than the demand curve.
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PRICE (Dollars per bag)
QUANTITY (Bags of handbags)
Tax Wedge
Demand
Supply
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.
A graph plots supply and demand for handbags, with price in dollars per bag ranging from 0 to 200 in increments of 20 on the y-axis and quantity in bags of handbags ranging from 0 to 1000 in increments of 100 on the x-axis. A downward sloping straight line labeled demand passes through the points (500, $100.00) and (430, $105.60); a positive sloping straight line labeled supply passes through the points (500, $100.00) and (430, $65.00). The curves intersect at (500, $100.00). A black vertical line labeled tax wedge connects the supply and demand curves to the left of their intersection via points (430, $105.60) along the demand curve and (430, $65.00) along the supply curve. The supply curve is steeper than the demand curve.
0
100
200
300
400
500
600
700
800
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1000
200
180
160
140
120
100
80
60
40
20
0
PRICE (Dollars per bag)
QUANTITY (Bags of handbags)
Tax Wedge
Demand
Supply
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.