Sales Taxes, Revenue, and Burden

The effect of a sales tax collected from buyers is to

A) Shift the demand curve up by the amount of the tax.

B) Shift the supply curve down by the amount of the tax.

C) Shift the demand curve down by the amount of the tax.

D) Shift the supply curve up by the amount of the tax.

E) Shift both the demand and the supply curve, each by half the amount of the tax.

The demand curve has equation P=50-Q and the supply curve has equation P=10+Q where P is price and Q is quantity. The competitive equilibrium price

and quantity are:

A) P= 30, Q=10B) P=30, Q=20C) P=20, Q=20D) P=10, Q=40E) P=40, Q=30

Why is that?

• In equilibrium supply equals demand.

• We have the demand curve with equation P=50-Q and the supply curve with equation P=10+Q.

• The demand and supply curves cross where

50-Q=10+Q. Solve for Q and you find Q=20.

Then P=50-Q=10+Q=30.

ExcessburdenOct21.swf

The demand curve has equation P=50-Q and the supply curve has equation P=10+Q where P is price in dollars

and Q is quantity. If a sales tax of $10 per unit is collected from buyers, the new equilibrium price and

quantity will be:

A) P= 35, Q=15B) P=35, Q=25C) P=25, Q=15D) P=10, Q=40E) P=30, Q=10

Why is that?

• A sales tax collected from demanders shifts demand curve down by amount of the tax.

• Old demand curve was P=50-Q. New one

Must be P=40-Q.

• The demand and supply curves cross where

40-Q=10+Q. Solve for Q and you find Q=15.

Then P=40-Q=10+Q=25.

ExcessburdenOct21.swf

As in the previous question, the demand curve has equation P=50-Q and the supply curve has equation

P=10+Q where P is price in dollars and Q is quantity. If a sales tax of $10 per unit is collected from buyers, how much revenue will the government raise with the

tax?

A) $150B) $100C) $200D) $300E) $350

Why is that?

With the tax, we found that the quantity sold is 15 units.The tax is $10 per unit. Tax revenue is tax per unit times quantity sold. $10x15=$150.

The Demand curve has equation Q=100-P. Supply curve has equation

Q=10+2P. A sales tax of $15 is introduced. The after-tax price to

demanders will

1. Rise by $5

2. Rise by $7.50.

3. Rise by $15.

4. Rise by $10

5. There is not enough information to tell.

Why is that?

Let x be the rise in buyer’s after-tax price and y the fall in supplier’s after-tax price.

We know that supply curve is twice as steep as the demand curve so y=2x. We

also know that x+y=$15 is total amount of the tax. So x+2x=$15. Therefore x=$5.

Another Reflex Check•

Enter the letter A on your clicker.

And on to our lecture…