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 in Competitive Markets

This question tests your understanding of how the burden of a tax (tax incidence) is shared between buyers and sellers in a market. The graph shows supply and demand for frisbees, with the supply curve shifting upward by the amount of the tax.

Key Terms and Formulas

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

• Buyer's Price (after tax): The price buyers pay after the tax is imposed.

• Seller's Price (after tax): The price sellers receive after the tax is imposed.

• Buyer's Share of Tax:

Step-by-Step Guidance

1. Identify the equilibrium price and quantity before the tax is imposed. This is where the original supply curve () intersects the demand curve ().

2. Locate the new equilibrium after the tax is imposed. This is where the new supply curve () intersects the demand curve ().

3. Read the price that buyers pay after the tax from the vertical axis at the new equilibrium quantity. This is the price on the curve at the new equilibrium quantity.

4. Read the price that sellers receive after the tax from the vertical axis at the new equilibrium quantity, but on the original supply curve ().

5. Calculate the buyer's share of the tax by subtracting the original equilibrium price (before tax) from the price buyers pay after the tax.

Try solving on your own before revealing the answer!