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The following information applies to the market for a particular items in the absence of a unit excise tax:

Price($ per unit) Quantity Supplied Quantity Demanded
4 50 200
5 75 175
6 100 150
7 125 125
8 150 100
9 175 75

According to the information above, in the absence of a unit excise tax, what is the market price? What is the equilibrium quantity?.
Suppose that the government decides to subject producers of this item to a unit excise tax equal to $2 per unit sold. What is the new market price? What is the new equilibrium quantity?
What portion of the tax is paid by producers? What portion of the tax is paid by consumers?

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  1. Market price with no tax is where supply equals demand, so at $7.
    b) The two dollar tax is reflected in the price that people have topay, but it does not give a firm extra income. For instance, pricewas $7 in part a. Now with the tax, people pay $9, but the firmonly earns $7. So the firm wants to sell 125, and consumers onlywant to buy 75. So basically, you look for where quantity demandedequals quantity supplied at a price level 2 dollars higher for theconsumers. Here it is $8. The firm earns 6 of that 8, so they wantto supply 100, and people demand 100 at a price of $8. Quantityequals 100.
    c) Each side picks up one dollar of the tax; the firm used to make7 dollars per unit and now only makes six, and the consumer used topay 7 dollars and now they pay 8.

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