Question

A state tobacco sales tax causes the demand curve for a particular brand of cigars to shift from D1 to D2. The tax is assessed at the point of sale as a tax on buyers. Use the area tool to draw the three-cornered area representing the producer surplus after the tax. To refer to the graphing tutorial for this question type, please click

Answer 1

Answer:

Demand curve shifts to the left due to sales tax. Producer surplus will decrease. Please see attached graph

Explanation:

The sales tax on the cigar caused the Demand curve to shift from D1 to D2 (as shown on the graph). A sales tax will cause the price of the cigar to rise (P1 to P2 on the graph); and ultimately a decrease in quantity demanded will occur (Q1 to Q2 on the graph). This, however, increases revenue collected by the government (B on the graph).

The producer surplus is shown by the shaded area (labelled A on the graph). “Producer surplus is the difference between how much a person would be willing to accept for given quantity of a good versus how much they can receive by selling the good at the market price. The difference or surplus amount is the benefit the producer receives for selling the good in the market” (Chappelow, 2019). Producer surplus will decrease as some of it goes to the government.