Effect of Tax on the Selling of Apples in a Small Scale - Assignment Example

Sales Tax Experiment #3Section 1: Experiment set-upThis experiment has three sessions namely; session 1, session 2 and session 3. The experiment aims at showing the effect of tax on the selling of apples in a small scale. In this experiment, the participants are in two equal groups of buyers and sellers. The participants then involve in buying and selling of apples in the different sessions. The objective of this experiment is to find out the effect of tax on demand and supply of goods in the market.

In the first session, there is no tax imposed on the selling of apples. In the experiment, the market session 1, the apple supplier has a seller cost of $18 for selling a bushel of apples. This scenario takes two rounds or instances of selling and the supplier’s interest are the amount of profit. According to the data, in round 1 the supplier sold a bushel of apples at $10 and the second round at $19. The formula to calculate profit is:Profit = price paid – seller cost which is $19 - $18 = $1 for the second round.

In the second set of data, session #1 has apples sold for every unit from 1 to 20. The indication is that the demand for the apples is high when there is no tax charged during the buying and selling of the apples. The demand of the apples in the experiment is less elastic than the supply.In the second session, the supplier bears the tax burden. In the experiment, the apple supplier still has a seller cost of $18 for a bushel of apples. Above the seller cost, the supplier must pay a sales tax of $15.

However, if the seller does not sell any apples, he does not pay either seller cost or sales tax. From the record of prices and profits, the supplier never sold a bushel of apples in either round 1 or 2 showing a significant decline in the profits to zero when the supplier pays the tax. From the second data set, session #2 indicates a drop in the supply of the apples. In the first 14 units sold, the sellers supply pattern indicates some increase in volumes of the sales of apple. On the other hand, from 15 to 20 units, the seller never sold any apples due to the high costs from taxes.

The tax burden shifts to buyers in the third session. The supplier of apples in the first set of data does not sell any apples due to drop in demand since the buyers deter from buying. In the second data set, the buyers could still afford the bushel of apples for up to 12 units sold. From 13 to 20 units, the supplier does not sell any apples.Section 2: Economic theory and prediction of resultsThis experiment uses a method of comparative statistics to analyze the effect of tax on demand and supply.

The economic theory that comes into play in this scenario is the optimal tax theory. This theory suggests the best way to effect taxation with minimal distortion of the demand and supply. According to this theory, sales tax imposed on suppliers and buyers has the same effect; reducing the demand and supply.In conclusion, the experiment shows the addition of tax when demand is higher than supply, the price of the goods or services increases significantly. The shifts in demand and supply depend on whether the tax affects the supplier or the buyer.

Works cited.Robin Bade and Michael Parki. Foundations of Microeconomics. Boston, MA : Pearson, 2011. print.