AP_Krugman_Textbook

510 section 9 Behind the Demand Curve: Consumer Choice

4. An excise tax imposed on sellers in a market will result in which
   of the following?
   I. an upward shift of the supply curve
   II. a downward shift of the demand curve
   III. deadweight loss
   a. I only
   b. II only
   c. III only
   d. I and III only
   e. I, II, and III
   5. An excise tax will be paid mainly by producers when
   a. it is imposed on producers.
   b. it is imposed on consumers.
   c. the price elasticity of supply is low and the price elasticity of
   demand is high.
   d. the price elasticity of supply is high and the price elasticity
   of demand is low.
   e. the price elasticity of supply is perfectly elastic.

Tackle the Test: Free-Response Questions

1. Refer to the graph provided. Assume the government has
   imposed an excise tax of $60 on producers in this market.

a. What quantity will be sold in the market?

b. What price will consumers pay in the market?

c. By how much will consumer surplus change as a result of

the tax?

d. By how much will producer surplus change as a result of

the tax?

e. How much revenue will the government collect from this

excise tax?

f. Calculate the deadweight loss created by the tax.

2,000 Quantity

$120

90

60

30

0 1,000 3,000

S

D

Price

Answer (8 points)

1 point:1,000

1 point:$90

1 point:Consumer surplus will decrease by $45,000, from $60,000 before the

tax to $15,000 after the tax.

1 point:Producer surplus will decrease by $45,000, from $60,000 before the

tax to $15,000 after the tax.

1 point:$60×1,000 = $60,000

1 point:$30,000

2. Draw a correctly labeled graph of a competitive market in
   equilibrium. Use your graph to illustrate the effect of an excise
   tax imposed on consumers. Indicate each of the following on
   your graph:
   a. the equilibrium price and quantity without the tax, labeled
   PEand QE
   b. the quantity sold in the market post-tax, labeled QT
   c. the price paid by consumers post-tax, labeled PC
   d. the price received by producers post-tax, labeled PP
   e. the tax revenue generated by the tax, labeled “Tax revenue”
   f. The deadweight loss resulting from the tax, labeled “DWL.”