Part 1: Suppose the government places a $3 tax per unit on this good. (a) What p

Question

Part 1: Suppose the government places a $3 tax per unit on this good. (a) What price will consumers pay for the good after the tax is imposed? (b) What price will sellers receive for the good after the tax is imposed? (c) How many units of this good will be bought and sold after the tax is imposed?

Part 2: After the imposition of the tax, (a) how much tax revenue is collected after the tax is imposed? (b) How much is the deadweight loss from this tax?

Part 3: Suppose the government increases the size of the tax on this good from $3 per unit to $6 per unit. Will the tax revenue collected from the tax increase, decrease, or stay the same? Explain your answer.

Explanation / Answer

Part 1.

If the government places a $3 tax per unit on this good.

(a) The price $6 will consumers pay for the good after the tax is imposed.

(b) The price $3 will sellers receive for the good after the tax is imposed.

(c) 60 units of this good will be bought and sold after the tax is imposed.

Part 2:

After the imposition of the tax,

(a) The tax revenue is collected after the tax is imposed = Tax * Quantity sold

= (6-3)* (60-0)   

=3*60

=$180

(b) the deadweight loss from this tax = 1/2*B*H

= 1/2* (60 -50)( 6-3)

= 1/2* 10* 3

=$15

Part 3: Suppose the government increases the size of the tax on this good from $3 per unit to $6 per unit.

Tax revenue =

= Tax * Quantity sold

= (8-2)* (40-0)   

=6*40

=$240

The tax revenue collected from the tax will increase. As can be seen that at tax of $3, tax revenue was $180 but at $6 tax, tax revenue is $240.

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