Consider the following demand and supply relationships in a market for cable TV
ID: 1220172 • Letter: C
Question
Consider the following demand and supply relationships in a market for cable TV service in the absence of a unit exercise tax: Graph these two relationships (Demand and Supply) on a carefully scaled diagram which you need not turn in but please do describe it. In full sentences distinguish between quantity-supplied and supply both verbally and with reference to the graph. According to the table and graph, in the absence of a unit excise tax, what is the price?....the equilibrium quantity? Please realize that in this market equilibrium, the price the consumer pays("buyers" price) equals the revenue per unit the seller receives ("sellers price"). Suppose that government level as $20 per unit tax on the produces (i.e., suppliers or sellers) of this good. A graph will help here: how does the new supply curve relate to your graph in .)? What is the new market price i.e., the price consumers will pay-for the good? What is the new equilibrium quantity? You may estimate and explain how you got your answer. What revenue per unit will sellers receive AFTER paying the $20 tax per unit to government? What portion of the tax is borne by producers?..by consumers? What is the value of tax revenue to government? Now calculate price elasticity of demand between the original equilibrium point and the after-tax point on the demand curve. Characterize it as elastic, inelastic or unit elastic and then calculate what has happened to total expenditures (i.e., total revenues) on the TV service. Pages 436-437 and Figure 19-2 from your book will help here.Explanation / Answer
a)The supply curve slopes upward whereas the demand curve slopes downward.
b)Quantity supplied is a specific amount of good provided at a specific price whereas
supply refers to the different quantities supplied at every possible price.The curve drawn
is the supply curve
c)In the absence of an excise tax equillibrium occurs where demand equals supply this
happens at a price of 80 and quantity of 60.
d)Applying excise tax on producer shifts up the supply curve by the entire amount of
the tax.