Suppose that the average cost of producing product X is constant and equal to the marginal cost which is $120. The demand for X is given by Qd = 2700 – 10P Now suppose the government imposes a $30 per unit tax on X.
a. Assuming a perfectly competitive market for X, what is the price paid by consumers both before and after the tax is imposed? Illustrate your answers in a diagram.
b. What is the price received by sellers before and after the tax? Also indicate in your diagram.
c. How much revenue is raised by the tax? Indicate in your diagram.
d. What is the excess burden of the tax? Indicate in your diagram. Now suppose that one firm buys all competitors so that the market becomes a monopoly market.
e. Assuming this does not affect demand or costs illustrate the effects of the $30 per unit tax in a new diagram and specifically determine the following: i. consumer price before and after the tax ii. seller price before and after the tax iii. tax revenue iv. excess burden