Answer to Question #117476 in Microeconomics for Emma

Question

Under the demand supply analysis let us assume that the price of hardwood is $50/unit. Now government has imposed a 5% tax to the seller which increased the cost of production. Explain the following with help of diagram. 1)do the cost of production affects cost and supply explain with reference of necessities and non essential goods 2)will there be movement along curve. Explain with reference to necessities and non essential goods 3)in order to maintain the same profit as before imposition of tax how much should the seller increase presuming a) demand of product is perfectly inelastic b) demand for good is perfectly elastic

Answer 1

1.If the government imposes a 5% tax on the hardwood seller the cost of production is increased which in turn results in increase in cost of hardwood >$50/ unit. The supply of timber is then decreased as it is not essential good.

2. There will be no movement along the curve as the good is not an essential one. The supply of product will also depend on the demand.

3. a)He would increase the price by $2.5/ units to be able to make some profit.

b) He will not increase the price, if he does so the consumer might not buy the hardwood from him any more.