Figure 6-11

Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed?

Question

Figure 6-11

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Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed?

BlackTom AI · Accepted Answer

First, I’ll restate the question and the options to set the stage for analysis.
Question: Figure 6-11 shows a market with a demand curve and a supply curve. A tax of $2 per unit is imposed on buyers. How much will buyers pay per unit after the tax is imposed?
Answer choices: 
- $3
- $7
- Between $5 and $7
- Between $3 and $5

Now, let’s analyze each option step by step.
Option 1: $3
- This would require the price buyers pay after tax to drop to $3. Since a tax on buyers raises the price they pay relative to the price sellers receive (Pb = Ps + 2), a price of $3 for buyers would imply a seller receives $1, which is inconsistent with the original supply curve intercept and the fact that the tax wedges the price paid by buyers upward. Given the original equilibrium price is $5, it is implausible for the post-tax buyer price to fall to $3 in a standard tax incidence scenario where the tax is levied on buyers.
- Conclusion for Option 1: This is not consistent with how a per-unit tax on buyers shifts the effective price; it’s too low compared to the original equilibrium and violates the tax wedge relationship.

Option 2: $7
- If buyers paid $7 per unit after the tax, the tax incidence would require sellers to receive $5 ($7 − $2). That would place the seller’s price at $5, which happens to be the pre-tax equilibrium price, but with a tax wedge of $2, the quantity transacted would be unlikely to remain at the original quantity. The demand curve at quantity with Pb = $7 would be lower than the original equilibrium quantity, leading to a different Q than before. This scenario would imply an inconsistent intersection given the original supply and demand lines.
- Conclusion for Option 2: This option is not consistent with the post-tax equilibrium where the tax reduces quantity and creates a wedge between Pb and Ps of $2.

Option 3: Between $5 and $7
- This range aligns with the tax wedge analysis. In the pre-tax equilibrium, the price was $5 and quantity 100. After a $2 per-unit tax on buyers, buyers’ price Pb must satisfy Pb = Ps + 2, where Ps comes from the original supply curve at the new quantity. Solving the intersection of the demand curve Pb = 10 − 0.05Q and the supply condition Ps = 0.05Q with Pb = Ps + 2 yields Q = 80 and Pb = 6. Therefore, buyers pay $6 after the tax, which lies between $5 and $7. Since the exact post-tax price is within this interval, this option correctly characterizes the outcome.
- Conclusion for Option 3: This is the correct qualitative conclusion about the post-tax price range for buyers.

Option 4: Between $3 and $5
- This would place Pb below the pre-tax equilibrium price. Given the tax wedge raises what buyers must pay by $2 relative to sellers, it is inconsistent for the post-tax Pb to lie below the original equilibrium price of $5. The tax on buyers pushes the price they pay upward, not downward, so this range is not supported by the standard tax incidence analysis.
- Conclusion for Option 4: This is incorrect because the buyer’s price after a buyer-paid tax should not fall into this lower range.

Putting it all together, the only option that matches the post-tax price range produced by the standard tax incidence analysis (Pb = 6, with Ps = 4) is the range that contains $6, i.e., Between $5 and $7.

Figure 6-11 Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed?

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Figure 6-11 ​ Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed?