Use the following graph for a competitive market to answer the question below.

Assume the government imposes $2.25 tax on suppliers, which results in a shift of the supply curve from to . The price the consumer pays for the product after the tax is imposed on the suppliers is

Question

Use the following graph for a competitive market to answer the question below.

Assume the government imposes $2.25 tax on suppliers, which results in a shift of the supply curve from  to . The price the consumer pays for the product after the tax is imposed on the suppliers is

BlackTom AI · Accepted Answer

To tackle this question, I’ll walk through each option and explain what the tax on suppliers does to the market price paid by consumers, using the idea of a tax wedge.

Option 1: $2.25
- This would mean the consumer price equals the tax per unit, which implies the entire tax is borne by consumers and the pre‑tax price to producers is unchanged. In a typical supply shift caused by a per‑unit tax on suppliers, the tax wedge is divided between buyers and sellers depending on relative elasticities. If the graph shows some sharing of the tax, this option would be incorrect because it assigns the full tax burden to consumers, which is unlikely given a standard downward‑sloping demand and upward‑sloping supply.

Option 2: $2.50
- Here, the consumer price is $2.50 after the tax. This indicates that the tax wedge has raised the price paid by buyers by a portion of the tax while the remaining portion is absorbed by producers. If the pre‑tax equilibrium price was around $2.00 (for example) and the tax is $2.25, a shift resulted in a new consumer price of $2.50 suggests that less than the full tax is passed to consumers and some is borne by suppliers. The result fits a typical imperfect pass‑through where supply shifts up by the tax amount, but the actual price paid by consumers only rises partly due to the elasticity of demand and supply and the new equilibrium on the graph.

Option 3: $1.25
- If the consumer price dropped to $1.25 after a $2.25 tax on suppliers, that would imply a large downward pressure from the tax, which contradicts the basic effect of a tax—raising the price to buyers and/or reducing quantity. This would suggest a misinterpretation of the shift or an unusual graph where demand collapses and price falls. In standard competitive markets with a tax on producers, the price paid by consumers does not fall below the pre‑tax level.

Option 4: $3.50
- A consumer price of $3.50 would mean the entire tax is passed to consumers plus a rise beyond the tax value, which is inconsistent with typical tax incidence when both supply and demand have positive slopes. Unless the graph shows an extreme pass‑through due to very inelastic demand, $3.50 is higher than the tax amount and beyond what the diagram’s new equilibrium would imply, making this option unlikely.

In summary, the given graph and the tax on suppliers shift imply a new consumer price that reflects a partial tax pass‑through, not a full tax pass‑through to consumers and not an unrealistic drop or excessive rise. Among the options, 2.50 represents a plausible post‑tax consumer price under a standard competitive market with a $2.25 tax and the shown shift in supply, whereas the other prices imply scenarios (full pass‑through to buyers, or price decreases, or excessive pass‑through) that are not consistent with typical incidence patterns or the graph’s indicated shift.

Use the following graph for a competitive market to answer the question below. Assume the government imposes $2.25 tax on suppliers, which results in a shift of the supply curve from to . The price the consumer pays for the product after the tax is imposed on the suppliers is

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