Consider product Z with the following demand and supply functions:

Qd = 200 – 4p

Qs = -40 + 2p

The government has not currently imposed an indirect tax on product Z. However, the production and consumption of product Z is considered undesirable. Subsequently, the government imposes an indirect tax on the product. The consumer pays a price of $44per unit after tax. Assume the product has an income elasticity coefficient of +3.

Use the above information to undertake the following:

i. Draw a demand and supply graph illustrating the market for Product Z both before and after the imposition of the indirect tax.

ii. Calculate the per unit tax.

iii. Calculate and explain consumer surplus, producer surplus, government surplus and deadweight loss before and after the imposition of the indirect tax.

iv. Calculate and interpret the own price elasticity of demand using the arc method. Show your workings.

v. Calculate and explain the burden of the tax. Discuss the relationship between the burden of the tax and the coefficient of elasticity calculated in part iv.

vi. The government increases direct (income) tax by 11% and this decreases average disposable income by 4%. Use the case study above as a guide to discuss the impact of this policy on the demand for Product Z.

vii. Explain whether the government is likely to increase indirect taxes or increase direct taxes in order to discourage the consumption of Product Z.

Answer rating: 100% (QA)

ii Tax is divided among the ratio of demand curve touching price axis equilibrium price equilibrium ... View the full answer