Q17. Refer to the figure below showing the market for frisbees before and after a tax is imposed. On each frisbee, the buyers' share of the tax is 

Background

Topic: Tax Incidence and Market Equilibrium

This question tests your understanding of how taxes affect supply and demand, and how the burden of a tax is shared between buyers and sellers in a market.

Key Terms and Formulas

• Tax incidence: The division of the tax burden between buyers and sellers.

• Supply curve (S): Shows the relationship between price and quantity supplied.

• Demand curve (D): Shows the relationship between price and quantity demanded.

• Vertical distance between S and S + tax: Represents the amount of tax per unit.

• Buyers' share of tax: The difference between the price buyers pay after the tax and the equilibrium price before the tax.

Step-by-Step Guidance

1. Examine the graph and identify the equilibrium price and quantity before the tax is imposed (where S and D intersect).

2. Locate the new equilibrium after the tax is imposed (where S + tax and D intersect). This is the price buyers pay after the tax.

3. Find the price sellers receive after the tax (where S and D intersect at the new quantity).

4. Calculate the buyers' share of the tax by subtracting the original equilibrium price from the price buyers pay after the tax.

Try solving on your own before revealing the answer!