FREE-RESPONSE REVIEW QUESTIONS
1. Analyze the following graph of the sugar market and how a per-unit excise tax affects
the following.
Sugar Market with Tax
P
S + Tax
$8
S
$6
$4
$2
5
10
Q
Sugar Market with Tax
(a) What is the size of the tax per unit onB-12
the sugar market?
(b) What is the total amount of tax revenue from the tax?
(i) Is the tax incidence between consumers and producers equal, do consumers
pay more of the tax than producers, or do producers pay more of the tax than
consumers?
(c) What is the price that consumers pay for sugar after the tax?
(i) What is the after tax, per-unit price received by producers for each sale?
(d) What was the equilibrium price and quantity before the tax?
(e) Now assume the price elasticity of demand becomes more inelastic, while supply
remains constant. Who will now pay more of the burden of the tax? Consumers?
Producers? Or will the burden of the tax be equal? Explain.
ELASTICITY, TAXATION, AND CONSUMER CHOICE
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