Question

Use the Supply and Demand model to illustrate the following scenarios:

1. The market for cigarettes when a new producer tax is placed on it. Label the effects on equilibrium price and quantity. You do not have to label the tax incidences.

2. The market for Vibranium when a new consumer tax is placed on it. Assume that the amount of the world's Vibranium cannot be increased because no one knows how to make or find it. Label the effects on equilibrium price and quantity. You do not have to label the tax incidences.

Also, below Graph 2, state whether the sellers, the consumers or both, will bear the burden of the tax.

Answer 1

1. The new producer tax will act as an increase in the marginal cost of the producer. Due to this, the supply curve will shift backwards due to the tax. The demand curve for cigarattes will be less elastic than the supply curve. This is because most consumers demanding cigarettes will be habitual to it.

2. In case of consumption tax, the demand curve will shift backwards. In this case, the supply curve will be perfectly inelastic because of the fixed reserves of Verbanium.