Question

The market for cheap beer is characterized by the following supply and demand curves: S : q = p + 3 D : q = −2p + 24 Suppose the government puts a $3 tax on cheap beer.

1. Using the point elasticity formula, calculate the price elasticities of supply and demand at the initial equilibrium. And do you expect the incidence of the tax to fall more heavily on the consumers or the producers? Explain.

2. Calculate the effects of the tax on: (i) the price faced by consumers, (ii) the price received by producers, and (iii) the quantity traded in the market.

3. Draw a graph showing the initial equilibrium and illustrating the impact of the tax. Label all curves and axes and all relevant prices and quantities. Identify in your graph the deadweight loss and the revenue raised for the government.

Answer 1

2.(a) as described in the part 1 in the image tax burden must be levied more on consumers, Thus, this would leads to increase in the price paid by the consumers.

(b) as not allthe burden but most of the tax burden has been levied to consumers this implies that some part of the tax burden has been levied to suppliers also. This would mean that the price they received would also falls.

(c) the quantity traded in the market would fall because suppliers are getting less price so they supplied less and consumer are paying more than the equilibrium so they demand less. And aggregately  the quantity traded in the market would fall.

Answer given in the image below :