Business
Economics Q&A Library

.12) In the effort to reduce alcohol consumption, thegovernment is considering a $1 tax on each gallon of liquor sold. The legal incidence of the taxwill be on producers. Suppose the demand for alcohol is described by QD= 500,000 – 20,000Pwhere QDis quantity and P is price per gallon (NOTE: theinversedemand curve would be P = 25– 0.00005QD). The supply curve is described at QS= 30,000P (NOTE: This would make the MCcurve MC = (1/30,000)QS).a.Draw the supply and demand curves before the tax is imposed. Calculate theequilibrium price and quantity.b.Add the tax to the supply curve. Calculate the new price per gallon consumers pay, theprice 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 byconsumers? How much of the tax is paid by producers?d.Calculate the elasticity of demand at the original equilibrium price. Calculate theelasticity 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 andold drinkers you would find that the demand for alcohol is more elastic among youngdrinkers 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 thatfalls on consumers? Expla

Question

Asked Oct 30, 2019

153 views

.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

= 500,000 – 20,000*P

where Q

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

inverse

demand curve would be P = 25

– 0.00005*Q

). The supply curve is described at Q

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

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

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

equilibrium price and quantity.

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.

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?

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

elasticity of supply at the original equilibrium price.

Calculate the deadweight loss of the tax.

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

Expert Answer

Step 1

Hey, Thank you for the question. According to our policy we can only answer up to 3 subparts per session. If you need further help, post the question again and mention the number that you want us to solve.

Step 2

(a)

The equilibrium before and after tax can be calculated as follows.

The equilibrium before tax can be calculated as follows.
500,000-20,000 30,000p
P 10
Q 300,000
The equilibrium after-tax can be calculated as follows.
d=Qs
500,000-20,000p 30,000 (p-1)
P 10.6
Q 300,000x (10.6-1)
288,000 — Image Transcription
The equilibrium before tax can be calculated as follows. 500,000-20,000 30,000p P 10 Q 300,000 The equilibrium after-tax can be calculated as follows. d=Qs 500,000-20,000p 30,000 (p-1) P 10.6 Q 300,000x (10.6-1) 288,000

Step 3

Consumers pay $10.5 and producers $9.6 as $1 goes for tax. Using th...

Tax revenue
Excess burden
$10.60
$10
unit tax
$9.60
Do
DI
Q
300,000
288,000 — Image Transcription
Tax revenue Excess burden $10.60 $10 unit tax $9.60 Do DI Q 300,000 288,000

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution

*Response times may vary by subject and question.

Tagged in

Business

Economics

Related Economics Q&A

Find answers to questions asked by student like you

Show more Q&A

Q: Draw a labor market for un-skilled labor assuming demand is perfectly inelastic. 8b. Insert a minimu...

A: Perfectly inelastic for the unskilled labor demand would be estimated to be vertical. It is define...

Q: Why does GDP depend on productivity in the long run?

A: Gross domestic product (GDP) is the monetary value of all final goods and services produced within a...

Q: 9. In a competitive market, the quantity of a product produced and the price of the product are dete...

A: Market: Market refers to the place where the buyers and sellers of the goods and services come in cl...

Q: Consider a simple economy that produces two goods: pens and erasers. The following table shows the p...

A: Nominal GDP is the market value of all final goods and services produced by a nation at the current ...

Q: 4.2 I dont understand how im supposed to do this without any numbers to use

A: In this case the rule of 70 is used.The rule of 70 basically estimates the number of years in which ...

Q: Average labor productivity tends to be a coincident variable. Examine Figure 3.15 care- fully. Durin...

A: A coincidental variable is used and analysed as it occurs. A coincidental variable is generally used...

Q: hey i was doing my homework and i couldnt figure out this one. please help

A: The average total cost is equated at an equal average fixed cost in addition to the average variable...

Q: Question 24 Consider the following production function when K is fixed. (This is a description of th...

A: False, the production function does not satisfy the law of decreasing marginal returns to labor.

Q: Based on the impact of a drop in the discount rate on the supply of money in the market. select an e...

A: Money supply: It is the total stock of money in circulation at a point in time and the money supply ...

BusinessEconomicsQ&A Library