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- Consider a country which taxes two goods, diamonds and bread. Each good has a supply elasticity of 1. The demand elasticity for diamonds is ηdd = −4; the demand elasticity for bread is ηbd = −0.25. In the market equilibrium, bread costs pb = $1 and a quantity of 100 is sold; diamonds cost $1000 and 10 are sold. Suppose a tax of τb = $0.50 is imposed on bread, and a tax of τd = $200 is imposed on diamonds. (a) What portion of the tax on bread is borne by consumers? What portion of the tax on diamonds is borne by consumers? (b) What is the deadweight loss from the tax on bread? What is the deadweight loss from the tax on diamonds? (c) Are these taxes optimal according to the Ramsey rule? If not, which tax should be increased and which should be decreased? (d) Are there any equity considerations which would argue against your answer for part (c)Suppose that the government decides to charge cola consumers an excise tax. Before the tax, 12 million cases of cola are sold every month at a price of $3.50 per case. After the tax, 6million cases of cola are sold every month; consumers pay $4.00 per case and producers receive $2.00 per case. a. What is the excise tax on cola?b. On whom does the incidence of the tax fall more heavily?c. How much government revenue will be generated by the excise tax?ANSWER E 2. The function of supply and demand for an item P = 14 - 2Q and P = 5 + 2Q. When againstthe goods are subject to tax of t = 2 per unit, then calculate:A. The point of market equilibrium after tax.b. Tax burden borne by consumers and producers.c. And if the item is given a subsidy of s = 1, determine itnew market balance.d. What is the amount of subsidies issued by the government.e. Draw the curve.
- Suppose the government removes a tax on buyers ofa good and levies a tax of the same size on sellers ofthe good. How does this change in tax policy affectthe price that buyers pay sellers for this good, theamount buyers are out of pocket (including any taxpayments they make), the amount sellers receive (netof any tax payments they make), and the quantity ofthe good sold?Suppose that your state raises its sales taxfrom 5 percent to 6 percent. The state revenuecommissioner forecasts a 20 percent increase insales tax revenue. Is this plausible? Explain.Some finance experts advise consumers not to worry aboutrising gasoline prices, the cost of which can easily be coveredby forgoing one takeout meal a month, but to worry abouthow high energy prices will affect the rest of the economy. Forexample, each dollar-a-barrel price increase is equivalent toa $20 million-a-day “tax” on the economy. Explain what thismeans.4. Capital M
- Suppose that the government imposes a tax onheating oil.a. Would the deadweight loss from this tax likely begreater in the first year after it is imposed or in thefifth year? Explain.b. Would the revenue collected from this tax likely begreater in the first year after it is imposed or in thefifth year? Explain.What happens to consumer and producer surpluswhen the sale of a good is taxed? How does thechange in consumer and producer surplus compareto the tax revenue? ExplainSuppose that before tax was imposed 400 million gallons of gasoline was supplied at $3.00 per gallon.a. What happens when government imposes a tax of 60 cents per gallon on sellers? b. How would such a tax affect the market for gasoline i.e. what is the new equilibrium? c. On whom does the incidence of the tax fall more heavily? d. How much government revenue will be generated by the excise tax? e. What happens when government imposes a tax of 60 cents per gallon on buyers? f. How would such a tax affect the market for gasoline i.e. what is the new equilibrium?
- Assume the government imposes a $2.00 tax on a good that costs $5.00. If the price buyers pay increases to $6.50 and the price sellers receive decreases to $4.50, who bears the greater burden of the tax? a. sellers b. buyers c. neither, the burden is split evenlyJ 4 pls explain in detail with the example under which tax system consumers are better off and why? I will thump up if explained properly.The market demand for steel is QD = 240–6P and the market supply for steel is QS= –60 +4P. Government imposes a $10 tax per unit of steel bought by the consumer. a) Who bears the economic incidence of this tax?b) Why does one side take more burden of tax than the other side?c) Calculate the deadweight loss of a $10 tax per unit levied on consumers of steel.