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EconomicsQ&A Library.12) In the effort to reduce alcohol consumption, the government is considering a $1 tax on each gallon of liquor sold. The legal incidence of the tax will be on producers. Suppose the demand for alcohol is described by Q D = 500,000 – 20,000*P where Q D is quantity and P is price per gallon (NOTE: the inverse demand curve would be P = 25 – 0.00005*Q D ). The supply curve is described at Q S = 30,000*P (NOTE: This would make the MC curve MC = (1/30,000)*Q S ). a. Draw the supply and demand curves before the tax is imposed. Calculate the equilibrium price and quantity. b. Add the tax to the supply curve. Calculate the new price per gallon consumers pay, the price per gallon producers receive, and the new equilibrium quantity. c. Calculate the amount of revenue the tax generates. How much of the tax is paid by consumers? How much of the tax is paid by producers? d. Calculate the elasticity of demand at the original equilibrium price. Calculate the elasticity of supply at the original equilibrium price. e. Calculate the deadweight loss of the tax. f. Suppose that if you were to disaggregate the market demand into young drinkers and old drinkers you would find that the demand for alcohol is more elastic among young drinkers than old drinkers. Which group of drinkers will change their behavior more? Which group of drinkers will bear the bigger burden of the proportion of the tax that falls on consumers? ExplaQuestion

.12) In the effort to reduce alcohol consumption, the

government is considering a $1 tax on each gallon of liquor sold. The legal incidence of the tax

will be on producers. Suppose the demand for alcohol is described by Q

D

= 500,000 – 20,000*P

where Q

D

is quantity and P is price per gallon (NOTE: the

inverse

demand curve would be P = 25

– 0.00005*Q

D

). The supply curve is described at Q

S

= 30,000*P (NOTE: This would make the MC

curve MC = (1/30,000)*Q

S

).

a.

Draw the supply and demand curves before the tax is imposed. Calculate the

equilibrium price and quantity.

b.

Add the tax to the supply curve. Calculate the new price per gallon consumers pay, the

price per gallon producers receive, and the new equilibrium quantity.

c.

Calculate the amount of revenue the tax generates. How much of the tax is paid by

consumers? How much of the tax is paid by producers?

d.

Calculate the elasticity of demand at the original equilibrium price. Calculate the

elasticity of supply at the original equilibrium price.

e.

Calculate the deadweight loss of the tax.

f.

Suppose that if you were to disaggregate the market demand into young drinkers and

old drinkers you would find that the demand for alcohol is more elastic among young

drinkers than old drinkers. Which group of drinkers will change their behavior more?

Which group of drinkers will bear the bigger burden of the proportion of the tax that

falls on consumers? Expla

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