The table below illustrates the market for Internet services. Use a demand-suppl
ID: 1178287 • Letter: T
Question
The table below illustrates the market for Internet services. Use a demand-supply
graph to answer the following questions.
Price Q Demanded Q Supplied
(dollars per month) (units per month)
0 30 0
10 25 10
20 20 20
30 15 30
40 10 40
50 5 50
60 0 60
a. What is the market price of Internet services?__________
b. If the government imposes a tax of $15 a month on the market, what price
would the buyer of an Internet service pay?__________
c. What price would the seller of the Internet service
receive?____________________
d. Does the buyer or the seller pay more of the tax? Explain
e. What is the tax revenue collected by the government?__________
f. What is the deadweight loss created by the tax?__________
Explanation / Answer
market price of Internet services = 20
elasticty of supply/elasticity of demand = 2/1
government imposes a tax, price the buyer of an Internet service pay = 20 + 15*2/3 = 30
government imposes a tax, price the seller of an Internet service receive = 20 - 15*1/3 = 15
The buyer and seller pay the taxes according to the inverse of the proportion of their elasticy of demand and supply, hence as the price change is more pronounced in supply, therefore less of the tax burden is shifted to the seller.
tax revenue by the govt. = 15*15 = 225
deadweight loss = 1/2*(30-15)*(20-15) = 37.5
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