TutorOn by Sanath Withanage

Question:

[Table Data] Qd is 650 at all prices. Qs_before is 650 at P=75. Qs_after is 650 at P=85. What was the tax per unit and the amount of price change after tax?
(1) Tax 10, price change 5.
(2) Tax 10, price change 10.
(3) Tax 50, price change 75.
(4) Tax 50, price change 85.
(5) Tax 10, price change 80.

Correct Answer:

(2)

Answer Explanation:

Initial equilibrium is where Qd = Qs_before (Q=650, P=75). After the tax, the new equilibrium is where Qd = Qs_after (Q=650, P=85). The price paid by consumers rose from 75 to 85, so the “price change” is Rs. 10. To supply the identical quantity of 650, producers now require Rs. 85 instead of Rs. 75, meaning the vertical shift of the supply curve (the specific tax) is exactly Rs. 10.

Topic: Taxation Year: 2019