2019 Micro Set 2, FRQ #2, Indirect Tax

2019 Micro Set 2, FRQ #2

Watch me answer it here

https://youtu.be/nOZkfrvmxRE

a) Using the graph, identify the following

i) The after-tax price and quantity.

ii) The area representing the total tax revenue received by the government.

Understand that the vertical distance between the two supply curves is the amount of the tax.

b) Now assume that the demand for hats is perfectly inelastic at Q3, while supply and per-unit tax remains unchanged.

i) Will the after tax price paid by consumers be higher, lower, or the same compared to the price in your answer in part (a) (i)?

ii) Will the total tax revenue received by the government be higher, lower or the same compared to the price in your answer in part (a) (i)? Explain.

c) If the demand for hats remain perfectly inelastic at Q3, and the per-unit sales tax is reduced, will producer surplus increase, decrease, or remain the same? EXPLAIN.

*Producer Surplus is the area below the price 

and above the supply curve