According to the chart, the citizens are being taxed at a rate of 20%. What is the most likely effect of this tax on the market for a normal good?

• A. The equilibrium quantity will decrease and the equilibrium price paid by buyers will decrease.
• B. The equilibrium quantity will decrease and the equilibrium price paid by buyers will increase.
• C. The equilibrium quantity will increase and the equilibrium price paid by buyers will decrease.
• D. The equilibrium quantity and price will both remain unchanged.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the effect of a tax on a normal good market. A tax on buyers or sellers typically shifts either the demand or supply curve, leading to a new equilibrium.
2. Step 2: Recognize that a 20% tax effectively increases the cost of purchasing the good, which reduces the quantity demanded at each price, shifting the demand curve to the left (if tax is on buyers) or increases the cost of supplying the good, shifting the supply curve to the left (if tax is on sellers).
3. Step 3: Analyze the new equilibrium after the tax. The intersection of the new demand or supply curve with the other curve determines the new equilibrium price and quantity.
4. Step 4: Note that the equilibrium quantity will decrease because the tax creates a wedge between what buyers pay and what sellers receive, reducing the quantity traded in the market.
5. Step 5: Understand that the price paid by buyers usually increases because sellers try to pass some of the tax burden onto buyers, even though buyers pay more, sellers receive less after tax, so the market price paid by buyers rises.