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The government places a tax on the purchase of socks. a. Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following areas both before and after the imposition of the tax: total spending by consumers, total revenue for producers, and government tax revenue. b. Does the price received by producers rise or fall? Can you tell whether total receipts for producers rise or fall? Explain. c. Does the price paid by consumers rise or fall? Can you tell whether total spending by consumers rises or falls? Explain carefully. ( Hint : Think about elasticity.) If total consumer spending falls, does consumer surplus rise? Explain.
Principles of Macroeconomics (Mind...
Principles of Macroeconomics (Mind...
The government places a tax on the purchase of socks.
a. Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following areas both before and after the imposition of the tax: total spending by consumers, total revenue for producers, and government tax revenue.
b. Does the price received by producers rise or fall? Can you tell whether total receipts for producers rise or fall? Explain.
c. Does the price paid by consumers rise or fall? Can you tell whether total spending by consumers rises or falls? Explain carefully. (Hint: Think about elasticity.) If total consumer spending falls, does consumer surplus rise? Explain.
Subpart (a):
Explanation of Solution
The market for socks will be characterized by the demand for socks and the supply of socks. When there is no tax imposed on the socks, there will be the equilibrium quantity and price determined at the intersection point of the demand and the supply curves. At the point of equilibrium, there will be no difference between the price paid by the buyers and the price received by the sellers. The imposition of tax leads to the price that the sellers receive below the equilibrium price PS and the price paid by the consumers to increase the price by PS + Tax. This situation can be illustrated on the graph as follows:
When there is no tax, the equilibrium price of socks is P1 and the equilibrium quantity is Q1. At this point of equilibrium, the consumer surplus is area above the price line and below the demand curve...
Sub part(b):
Sub part(c):
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