In the presence of a tax on suppliers, which of the following best describes the effect on the market equilibrium?

• A. The supply curve becomes perfectly elastic, and the equilibrium price remains unchanged.
• B. The demand curve shifts upward by the amount of the tax, resulting in a higher equilibrium price and higher equilibrium quantity.
• C. The demand curve shifts downward by the amount of the tax, resulting in a lower equilibrium price and higher equilibrium quantity.
• D. The supply curve shifts upward by the amount of the tax, resulting in a higher equilibrium price and lower equilibrium quantity.

Answer: (D)

Verified step by step guidance

1. Understand that a tax on suppliers effectively increases their cost of supplying each unit of the good. This means that for any given quantity, suppliers now require a higher price to cover the tax.
2. Recognize that this increase in cost shifts the supply curve vertically upward by the amount of the tax. Mathematically, if the original supply function is \(S(p)\), the new supply function becomes \(S(p - t)\), where \(t\) is the tax per unit.
3. Analyze the effect of this supply shift on the market equilibrium by setting the new supply equal to demand: \(D(p) = S(p - t)\). This will help find the new equilibrium price and quantity.
4. Note that because the supply curve shifts upward, the new equilibrium price paid by consumers will be higher than before, but the price received by suppliers (after tax) will be lower than the original price.
5. Conclude that the higher price leads to a decrease in the equilibrium quantity traded in the market, as the tax creates a wedge between what consumers pay and what suppliers receive.