Question

1. draw a diagram that illustrates the effect of the luxury tax in the yacht market (i already did this, i think its just a shift of the supply curve to the left???)

2. how does the tax cause yacht builders to lose their jobs (or go out of business)? As part of your answer, use your diagram to illustrate the impact of the tax on yacht builders that lose their jobs (or go out of business).

3. how does the tax affect yacht builders that dont lose their jobs (stay in business)? As part of your answer, use your diagram to illustrate the impact on yacht builders that dont lose their jobs (stay in business).

4. how does the tax affect yacht buyers? As part of your answer, use your diagram to illustrate the two ways that buyers of yachts are impacted by the tax.

Answer 1

1. As a result of the tax, the supply curve shifts to the left from S to S1.

2. Yatch builders lose their jobs because, the quantity of yachts in the market falls from 9 to 7. So,producers decrease the production of yatches. Those producers who have a reservation price of more than 3.60 (indicated by the red part of suppy curve S, close down production. So, the yacht makers (workers) lose jobs.

3. Those who stay in business get lower revenues. Before tax, revenues were $28 (4.00 * 9 = 36). After tax now, their revenue is $25.20 (3.60 * 7 = 25.20). So their profits are down.
Producer surplus before tax = ½*(4.00-2.20)*9 = 8.1
Producer surplus after tax = ½*(3.60-2.20)*7 = 4.9
Producer surplus has decreased. Which means producers are wrse off.

4. After tax, buyers have to pay a higher price. The price is higher by $0.80. (4.80 - 4.00 = 0.80)
Secondly, there is less quantity in the market now. Quantity has fallen by 2 untis.
So, those buyers whose willingness to pay is less than $4.80 (indicated by the red part of the demand curve) are unable to buy a yacht.
Consumer surplus decreases.
Consumer surplus before tax = ½*(7.60 - 4.00)*9 = 16.20
Consumerr surplus after tax = ½*(7.60-4.80)*7 = 9.80
So, consumers are also worse off.