Question

In a market, the equilibrium price is 10 and the equilibrium quantity is 200. The state is now introducing a tax on
producers leading to a new equilibrium where the price is 15 and the quantity is 125
How big is the consumer tax burden?
a) 625
b) 187.5
c) 375
d) Can not be determined with the given information

Answer 1

In a market, the equilibrium price is 10 and the equilibrium quantity is 200.

The state is now introducing a tax on producers leading to a new equilibrium where the price is 15 and the quantity is 125.

Hence, the price increases from 10 to 15. Consequently the equilibrum quantity decreases from 200 to 125.

Hence, change in price (∆P) is

∆P = 15 - 10 = 5

Also, change in quantity (∆Q) is

∆Q = 125 - 200 = -75

Hence, net effect of tax on consumer is

∆W = ∆P.∆Q = 5×(-75)

or, ∆W = -375

Hence, the consumer tax burden is 375.

Answer is option (c) i.e. 375.

Hope the solution is clear to you my friend.