Answered: In an effort to reduce alcohol…

Microeconomics

13th Edition

ISBN:9781337617406

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter5: Supply, Demand, And Price: Applications

Section5.2: Application 2: Subsidizing The Consumption Of Anything Can Raise Its Price

Problem 1ST

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In an effort to reduce alcohol consumption in Jamaica, the government of Jamaica (GOJ) is considering levying a $2/unit tax on the sale of coconuts (i.e., on the consumer). Suppose the demand curve for liquor is: Q^d = 2000 -100p .....(1)

and the supply curve for liquor is: Q^s = -100 +200p .....(2)

i) State who bears the statutory incidence of a $2 per unit tax on the sale of liquor? And who bears the economic incidence of this tax?

ii) Calculate the pre-tax and post-tax equilibria, and explain the new equilibrium results in terms of: consumer tax burden, producer tax burden, tax wedge, and government revenue.

iii) Provide a carefully labelled graphical analysis of your answers in part a(ii). Indicate on your graph, with accuracy, the pre-tax and post-tax equilibria, consumer tax burden, producer tax burden, and government revenue.

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