Below is the demand and supply schedules for coffee at 7-Eleven. If the tax of 30 cents is now imposed, what is the tax per unit borne by consumers and producers?

Question

BlackTom AI · Accepted Answer

To analyze the tax incidence, we first identify the pre-tax equilibrium from the given schedules. At price 60 cents, quantity supplied equals 140 units and quantity demanded also equals 140 units, so the original equilibrium is price = 60 and quantity = 140.

Next, we consider a per-unit tax of 30 cents imposed on sellers, which effectively shifts the supply curve upward by 30 cents. In other words, for any produced quantity, sellers now require a higher price by 30 cents to be willing to supply the same amount.

After the tax, let Ps be the price received by producers and Pc be the price paid by consumers. The relation between them is Pc = Ps + 30. We look for a point where quantity demanded at Pc equals quantity supplied at Ps.

Using the schedules, test Ps values and find a match with Pc = Ps + 30:
- If Ps = 50, then Pc = 80. From the demand side, at Pc = 80 the quantity demanded is 120 units. From the supply side, at Ps = 50 the quantity supplied is 120 units. This matches, so the post-tax equilibrium is Ps = 50, Pc = 80, Q = 120.

Now determine the tax burden on each group by comparing to the pre-tax equilibrium price of 60:
- Consumers pay Pc = 80, which is 20 cents higher than the original price of 60. This means consumers bear 20 cents of the tax.
- Producers receive Ps = 50, which is 10 cents lower than the original price of 60. This means producers bear 10 cents of the tax.

Therefore, the tax incidence is 20 cents borne by consumers and 10 cents borne by producers, totaling the 30-cent tax.

Why other nearby allocations do not fit:
- If we tried to have consumers pay the full 30-cent tax (Pc = 90) while producers receive 60 (Ps = 60), the corresponding quantities would not balance: Qd at Pc = 90 is 100, but Qs at Ps = 60 is 140, so supply would exceed demand, not equilibrate.
- If producers bore all 30 cents (Ps = 60 − 30 = 30, Pc = 60), the demanded quantity at Pc = 60 would be 140, while supplied at Ps = 30 would not align with the table (the schedule starts at 40 with Qs = 90). Again, no equilibrium.
- The correct intersection, Ps = 50 and Pc = 80, yields a balanced 120 units, matching both sides' schedules after tax.

Final takeaway: after a 30-cent tax, consumers pay 20 cents more, producers receive 10 cents less, summing to the 30-cent tax.

ECX2630 - ECX5630 - WS-01 2025 Actual Mid-Semester Test scheduled on Tues 1 July @ 6.00pm Melb. time

Below is the demand and supply schedules for coffee at 7-Eleven. If the tax of 30 cents is now imposed, what is the tax per unit borne by consumers and producers?

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ECX2630 - ECX5630 - WS-01 2025 ***Actual Mid-Semester Test scheduled on Tues 1 July @ 6.00pm Melb. time***

Below is the demand and supply schedules for coffee at 7-Eleven. If the tax of 30 cents is now imposed, what is the tax per unit borne by consumers and producers?

View Explanation

Log in for full answers

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More Practical Tools for Students Powered by AI Study Helper

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ECX2630 - ECX5630 - WS-01 2025 Actual Mid-Semester Test scheduled on Tues 1 July @ 6.00pm Melb. time

Figure 6-11 Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. Which of the following is correct?

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