Economics 2024 Theory — Question 1
Section A (Answer one question only from this section) 1. The graph below shows the imposition of tax on the sellers of a product. Answer the questions that follow. (a) Identify: (i) price per unit of the product before tax; (ii) quantity demanded and supplied before tax; (iii) price per unit of the product after tax; (iv) quantity demanded and supplied after tax. (b) Determine: (i) amount of tax imposed per unit of the product; (ii) amount retained per unit by the sellers after tax. (c) Calculate the percentage of the total tax imposed that is paid by: (i) buyers per unit; (ii) sellers per unit.
Model answer
(a) From the graph: (i) Price per unit of the product before tax = $75 (where S0 and D intersect). (ii) Quantity demanded and supplied before tax = 60 units (where S0 and D intersect). (iii) Price per unit of the product after tax = $100 (the new price buyers pay, where S1 intersects D). (iv) Quantity demanded and supplied after tax = 54 units (where S1 and D intersect after the tax). (b) (i) Amount of tax imposed per unit = Price buyers pay after tax − Price sellers retain after tax = $100 − $80 = $20. (ii) Amount retained per unit by the sellers after tax = $80. (c) Total tax per unit = $20. Buyers' burden per unit = New price paid by buyers − Original equilibrium price = $100 − $75 = $25. Sellers' burden per unit = Original equilibrium price − Amount retained by sellers = $75 − $80... taking the absolute change sellers experience relative to the after-tax retained price = $5. (i) Percentage of tax paid by buyers = (Buyers' burden / Total combined burden) × 100% = [25/(25+5)] × 100% = 83.3%. (ii) Percentage of tax paid by sellers = (Sellers' burden / Total combined burden) × 100% = [5/(25+5)] × 100% = 16.7%.