Price(dollars perpound)Quantitydemanded(pounds per day)Quantity supplied(pounds per day)1 480 02 360 03 240 2404 120 4805 0 7203) The table above shows the demand and supply schedules for the market for coffee in Roastville. A tax on coffee of 75 cents per pound is proposed and the local government asks you to examine the effects of the tax.a) Draw the demand and supply curves. If there is no tax on coffee, what is the price and how many pounds are sold?b) With the tax, what is the price that consumers pay? What is the price that sellers receive? Howmany pounds of coffee are sold?c) What is the government's total tax revenue? How much of the 75¢ per pound tax is paid by buyers? How much is paid by sellers?d) If there are no external costs and benefits, what is the efficient level of coffee production?e) If the tax is imposed, will the level of production be efficient? Why or why not?Answer: a) The figure is above. With no tax, the equilibrium price is $3 and 240 pounds of coffee per day are sold.b) The tax shifts the supply curve upward by $0.75. The new equilibrium price that consumers pay is $3.50. Sellers receive the price that consumers pay minus the tax, or $3.50 - $0.75 = $2.75. With the tax, 180 pounds of coffee per day are sold.c) The government's tax revenue is the tax per pound, 75¢, multiplied by the number of pounds sold, 180. So the government's total tax revenue is 75¢ × 180, which is $135 per day. With the tax, the price that buyers pay is 50¢ higher than with no tax, so the buyers pay 50¢ of the tax. Sellers pay the rest of the tax, 25¢.d) The efficient level of production is 240 pounds of coffee per day. At this level, the marginal social benefit ($3.00) equals the marginal social cost.e) If the tax is imposed, the level of production is not efficient. The marginal benefit from the lastpound of coffee ($3.50) is greater than the marginal cost ($2.75). The underproduction is 60 pounds of coffee per day.Topic: TaxesSkill: AnalyticalQuestion history: Previous edition, Chapter 6AACSB: Analytical
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