The government decided to impose a tax of NIS 10 per unit on the manufacturers of...

The government decided to impose a tax of NIS 10 per unit on the manufacturers of clothing goods, which until now were exempt from taxes.

a. In a graph analyze and present the effect of this step taken by the government on quantity produced of clothing goods, on the price paid by consumers and on the price received by the manufacturer. In a graph (diagram) show the government receipts and the deadweight loss.

b. Will your answer to (a) above change if the tax is imposed on the consumers?

c. What happened to the consumer surplus and the producer surplus? Explain what the division of burden between the manufacturers and the consumers is dependent upon.

d. The government is considering raising the tax to NIS 20 per unit. The economic consultant of the Finance Minister argued that such a step would cause a reduction in the tax revenues in the clothing market. Is this possible?

Expert Solution

Rahul Sunny answered 2 years ago

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