If consumers are willing to pay $7.00 per unit for this product, suppliers will supply a quantity of 50. Of the $7.00 paid by consumers, $4.00 must be turned over to pay the tax, so firms are receiving $3.00 per unit. We can see that, according to the supply curve S, they will supply a quantity of 50 units when they receive $3.00 per unit.

    If consumers pay a market price of $8.50 firms can keep $4.50 as revenue, so we see from S that they will supply 60 units. Next we need to incorporate the demand side of the market and see what effect an excise tax has on equilibrium price and quantity.

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