Thos question comes from Gregory Mankiw Principles of Microeconomics fourth edition. I am not sure how to do this problem. Can you help me please.
The government places a tax on the purchase of socks.
A. Illustrate the effect of the tax on equilibrium price and quantity in the sock market. ID the following areas both before and after the imposition of the tax: total spending by consumers, total revenue form producers, and government tax revenue.
B. Does the price received by producers rise or fall? Can you tell whether total spending by consumers rises or falls? Explain carefully. (Hint: Think about elasticity.) If total consumer spending falls, does consumer surplus rise? Explain.
C. Does the price paid by consumers rise or fall? Can you tell whether total spending by consumers rises or falls? Explain carefully. (Hint: Think about elasticity.) If total consumer spending falls, does consumer surplus rise? Explain.
Dont get confused by character of corporate equities (stocks). This is a simple supply and demand graph.
Draw a simple supply and demand curves for stocks find equilibriums for price (Po) and quantity (Qo). Total spending is Po*Qo.
Now shift the supply curve inward, reflecting the new tax. (How the supply curve shifts depends on the nature of the tax. Say the tax is x% of the selling price. Then, the old and new supply curve will look like a tilted V.)
Price paid (P*) will be the new equilibrium price. Q* will be the new equilibrium quantity. Using the ORIGINAL supply curve, find the price P^ associated with Q*; this will be the price received by sellers. The difference between P* and P^ is the per-unit tax.
Price received by sellers falls, (P^<Po). Price paid by buyers rises (P*>Po). If demand is inelastic, total spending by consumers rises. Consumer surplus definately falls, regardless of demand elasticities.
Uh... that's SOCKS not Stocks :)
To solve this problem, you need to understand the concept of tax incidence and the impact of taxes on equilibrium price and quantity. Let's break down each part of the question and explain how to approach it.
A. To illustrate the effect of the tax on equilibrium price and quantity in the sock market, you can follow these steps:
1. Draw a supply and demand graph for the sock market.
2. Identify the initial equilibrium price and quantity before the tax is imposed.
3. Introduce the tax by shifting the supply curve upward by the amount of the tax.
4. The new equilibrium will occur at a higher price (paid by consumers) and a lower quantity.
5. The difference between the new equilibrium price and the initial equilibrium price is the tax paid by consumers.
6. Calculate the total spending by consumers by multiplying the new equilibrium price by the new equilibrium quantity.
7. Total revenue from producers can be calculated by multiplying the initial equilibrium price by the new equilibrium quantity.
8. Government tax revenue can be calculated by multiplying the tax per unit by the new equilibrium quantity.
B. The price received by producers will fall due to the tax. This is because the tax shifts the supply curve upward, reducing the price producers receive. However, whether total spending by consumers rises or falls depends on the elasticity of demand. Elastic demand means that consumers are responsive to changes in price, resulting in a larger decrease in total spending. In this case, it is not possible to determine whether total consumer spending rises or falls without more information about the demand elasticity.
Consumer surplus refers to the difference between what consumers are willing to pay and what they actually pay. If total consumer spending falls due to the tax, consumer surplus may or may not rise. It depends on how much the price paid by consumers increases compared to their perceived value of the socks. If the increase in price is smaller than the decrease in total spending, consumer surplus may rise. However, without knowing specific values, it is challenging to determine the exact impact on consumer surplus.
C. The price paid by consumers will rise due to the tax. This is because the tax is added to the equilibrium price, resulting in a higher price paid by consumers. Similar to part B, whether total spending by consumers rises or falls depends on the elasticity of demand. Elastic demand means that consumers are responsive to changes in price, resulting in a larger decrease in total spending. Again, without more information about the demand elasticity, it is not possible to determine whether total consumer spending rises or falls.
In terms of consumer surplus, if the price paid by consumers rises and total consumer spending falls, consumer surplus may or may not rise. It depends on how much the increase in price affects the perceived value of the socks. If the increase in price is larger than the decrease in total spending, consumer surplus may decrease. However, without specific values, it is challenging to determine the exact impact on consumer surplus.
Remember, understanding the concepts and applying them correctly is crucial in solving these types of problems. Make sure to review the relevant concepts from your textbook, and if you're still unsure, consult your professor or TA for further clarification.