Question

About how much of the tax is paid by the sellers? (LO7) a) 80 cents d) 35 cents b) 65 cents e) 10 cents c) 50 cents

Short answer

Assuming an equal tax burden distribution between buyers and sellers, the sellers' share of tax paid for each amount would be: a) 40 cents, b) 32.5 cents, c) 25 cents, d) 17.5 cents, and e) 5 cents. However, without the proper information about tax burden distribution, we cannot provide a correct answer to the original question.

Step-by-step solution

Identify the Total Tax Paid

According to the initial exercise, the total tax paid consists of the following amounts: a) 80 cents b) 65 cents c) 50 cents d) 35 cents e) 10 cents

Use the Assumed Tax Distribution to Calculate Sellers' Share

Using the assumption that both buyers and sellers pay 50% of the total tax, you can calculate the sellers' share for each amount: a) Sellers' share = 50% of 80 cents = \(0.5*0.80 = $0.4\) or 40 cents b) Sellers' share = 50% of 65 cents = \(0.5*0.65 = $0.325\) or 32.5 cents c) Sellers' share = 50% of 50 cents = \(0.5*0.50 = $0.25\) or 25 cents d) Sellers' share = 50% of 35 cents = \(0.5*0.35 = $0.175\) or 17.5 cents e) Sellers' share = 50% of 10 cents = \(0.5*0.10 = $0.05\) or 5 cents As stated earlier, this solution is based on an assumption of equal distribution of tax burden between buyers and sellers, which may not be accurate for the given exercise. Without the proper information about tax burden distribution, we cannot provide a correct answer to the original question.

Key concepts

Understanding Tax Burden

Tax burden refers to the economic effect of a tax on different market participants. It's an essential concept as it influences consumer behavior and market dynamics. When a tax is imposed, it doesn't matter who it is legally applied to—the real cost, or burden, is split between buyers and sellers based on elasticity.

Elasticity refers to how much the quantity supplied or demanded responds to changes in price. When demand is inelastic, buyers bear more of the tax. Conversely, when supply is inelastic, sellers bear a greater portion. This sharing of the tax influences prices and can result in either reduced consumption or reduced supply.

• Important to note: Legal responsibility and actual burden are not the same.
• The side of the market (buyers or sellers) that is less elastic will shoulder more of the tax burden.

Tax Distribution from Buyers to Sellers

Tax distribution illustrates how the tax burden is split between buyers and sellers. In an exercise calculation, this is often simplified by initially assuming an equal sharing, like 50% each. However, in reality, tax distribution depends on the price elasticity of demand and supply.

For example, the assumption of equal distribution in the original exercise solution might not be accurate. In practice, slightly more mathematical rigor is needed to accurately allocate the tax burden.

• A fair distribution considers elasticity: the less elastic side bears more tax weight.
• Understanding these principles will provide insights into changes in prices post-tax.

Economic Equilibrium and Tax Impact

Economic equilibrium is a state where market supply equals market demand, leading to a stable price level. When a tax is introduced, it disrupts this balance and creates a new equilibrium.

In this new equilibrium, both prices and quantities consumed and sold may change. The exact shift in equilibrium depends on how demand and supply react to the tax. This is why understanding the elasticity of supply and demand is crucial, as it determines the magnitude of impact on prices and quantities.

• Post-tax, the market rebalances to a new equilibrium.
• Prices increase for consumers, and suppliers might supply less due to decreased net revenues.
• Studying shifts in this equilibrium helps predict changes in market behavior post-tax.