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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

A government imposes a specific tax of ₹6 per unit on producers of a good. The original supply curve is Qs = 10P − 20 (P in ₹, the price consumers pay in the market). Assuming the tax is collected from producers, which description of the new supply curve is correct?

Producers keep only P minus 6, so supply becomes 10(P−6) − 20, which equals 10P − 80. The curve shifts vertically upward by ₹6 at every quantity, equivalent to a leftward shift, because sellers need a higher price to supply the same output.

  1. AQs = 10P − 80, an upward shift in the price needed for each quantity by ₹6Correct
  2. BQs = 10P − 14, a leftward shift by ₹6 in quantity
  3. CQs = 10P + 40, a rightward shift
  4. DQs = 10P − 20, unchanged, because the tax falls on the government
  5. Qs = 10P − 26, a downward shift in price of ₹6

Explanation

Producers receive P − 6 after tax, so the quantity supplied is 10(P−6) − 20 = 10P − 80. At any quantity, the market price must be ₹6 higher, so the supply curve shifts up (left) by ₹6. Option with −14 subtracts 6 from quantity instead of price, and +40 has the wrong sign.

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