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 ).   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? Explain

Question
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
).
 
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? Explain

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