Suppose that an ad valorem tax of 10% is imposed on producers of butter.The bread market supply is Qs = 10 + P and the bread market demand is Qd = 220-P.What is the producers' tax burden?
A) Producers' tax burden is $8.
B) Producers' tax burden is $10
C) Producers' tax burden is $4.
D) Producers' tax burden is $5.

Question

Quizplus · Accepted Answer

To find the producers' tax burden, we need to calculate the difference between the price the producers receive after the tax (Pp) and the price they would have received without the tax (Pw).

First, let's find the equilibrium price and quantity without the tax:

Qs = Qd 
10 + P = 220 - P 
2P = 210 
P = $105

So, without the tax, producers would receive a price of $105 per unit.

With the tax, the price the producers receive is equal to 90% of the price paid by consumers. So:

Pp = 0.9(Pw) 
Pp = 0.9($105) 
Pp = $94.50

The difference between the price with the tax and the price without the tax is:

Pw - Pp = $105 - $94.50 = $10.50

However, the tax is only 10% of the original price, so the producers' tax burden is:

$10.50 x 0.10 = $1.05

Therefore, the correct answer is D, which is the closest option to $1.05.

Suppose That an Ad Valorem Tax of 10% Is Imposed