Question

The government places a tax on the purchase of socks. a. Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following areas both before and after the imposition of the tax: total spending by consumers, total revenue for producers, and government tax revenue. b. Does the price received by producers rise or fall? Can you tell whether total receipts for producers rise or fall? 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.

          The government places a tax on the purchase of socks.
a. Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following areas both before and after the imposition of the tax: total spending by consumers, total revenue for producers, and government tax revenue.
b. Does the price received by producers rise or fall? Can you tell whether total receipts for producers rise or fall? 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.

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Added by Scott K.

Principles of Economics

Gregory Mankiw 8th Edition

Chapter 26

Instant Answer

Solved by Expert Erwin Antoni

03/27/2020

Step 1

Before the tax, the sock market is in equilibrium, with supply and demand determining the equilibrium price and quantity. Let's call this price P1 and quantity Q1. Show more…

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The government places a tax on the purchase of socks. a. Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following areas both before and after the imposition of the tax: total spending by consumers, total revenue for producers, and government tax revenue. b. Does the price received by producers rise or fall? Can you tell whether total receipts for producers rise or fall? 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.

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Transcript

00:01 This problem has a lot of parts to it.

00:03 So let's try to go through step by step and not leave anything out.

00:08 So what do we need to do? we need to illustrate the effect of attacks on the purchase of socks.

00:15 We need to show how that's going to change the price and quantity in the market.

00:26 Let's draw our demand curve.

00:30 And let's draw a supply curve.

00:33 Okay.

00:33 Okay, so we start off with a price about here and a quantity about here.

00:41 All right, now let's impose a tax.

00:47 We have a new quantity and new prices.

00:54 That vertical green line is just the amount of the tax.

00:59 All right.

01:01 So we see that the quantity has decreased and the price has increased by the amount of the of the tax.

01:11 Now we have to identify the areas before and after the imposition of the tax.

01:15 Total spending by consumers.

01:17 Let's do that first.

01:20 Total spending by consumers was previously q times p.

01:29 Right.

01:29 So it was our original q star, we'll call it, and p star.

01:37 Those were the original price and quantity.

01:40 Now, what is the new price and quantity? well, it's going to be our quantity with the tax and the price paid by consumers with the tax.

01:55 So now the new amount paid by consumers, the total spending by consumers, is going to be that qt times pt...

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