This problem deals with the effects of taxation. Suppose that the market demand curve for a good is given by P 100 Q and that the market supply curve is given by P 10Q On a piece of paper, graph these curves. a) Set the P values equal using the above formulas, and solve for Q to find the equilibrium quantity, at which the supply and demand curves intersect. The equilibrium quantity is given by Q Substitute this value back into the demand function to find the equilibrium price, which is given by P . b) Now suppose that a tax of $1 per unit is levied on each unit of output. As a result, the market supply curve shifts up by one unit. The curve is now given by P = 11 Q Repeating the steps of part (a), the new equilibrium quantity is Q and the equilibrium price is P (include one digit following the decimal point). Comparing the P value to that from part (a), the $1 tax has led to a price increase of cents. Illustrate this outcome in your diagram. c) Suppose instead that the market demand curve is given by P = 100 - 3Q. This curve is O A. flatter O B. steeper than the curve from part (a). Assuming that no tax is present, so that the supply curve is once again P 10 Q, compute the equilibrium quantity and price in the market. These values are given by Q and P (include one digit following the decimal point). d) Now reimpose the $1 tax, so that the supply curve is P (include two digits following the decimal point). In this case, the $1 tax has led to a price increase of and P 11 Q. The new equilibrium quantity and price values are Q cents. e) Based on the above answers, you can conclude that, when demand is less price sensitive (when the demand curve is steeper and thus more inelastic), the share of a tax passed on to consumers in the form of a higher price is O A. smaller O B. greater
This problem deals with the effects of taxation. Suppose that the market demand curve for a good is given by P 100 Q and that the market supply curve is given by P 10Q On a piece of paper, graph these curves. a) Set the P values equal using the above formulas, and solve for Q to find the equilibrium quantity, at which the supply and demand curves intersect. The equilibrium quantity is given by Q Substitute this value back into the demand function to find the equilibrium price, which is given by P . b) Now suppose that a tax of $1 per unit is levied on each unit of output. As a result, the market supply curve shifts up by one unit. The curve is now given by P = 11 Q Repeating the steps of part (a), the new equilibrium quantity is Q and the equilibrium price is P (include one digit following the decimal point). Comparing the P value to that from part (a), the $1 tax has led to a price increase of cents. Illustrate this outcome in your diagram. c) Suppose instead that the market demand curve is given by P = 100 - 3Q. This curve is O A. flatter O B. steeper than the curve from part (a). Assuming that no tax is present, so that the supply curve is once again P 10 Q, compute the equilibrium quantity and price in the market. These values are given by Q and P (include one digit following the decimal point). d) Now reimpose the $1 tax, so that the supply curve is P (include two digits following the decimal point). In this case, the $1 tax has led to a price increase of and P 11 Q. The new equilibrium quantity and price values are Q cents. e) Based on the above answers, you can conclude that, when demand is less price sensitive (when the demand curve is steeper and thus more inelastic), the share of a tax passed on to consumers in the form of a higher price is O A. smaller O B. greater
Microeconomics: Principles & Policy
14th Edition
ISBN:9781337794992
Author:William J. Baumol, Alan S. Blinder, John L. Solow
Publisher:William J. Baumol, Alan S. Blinder, John L. Solow
Chapter17: Taxation And Resource Allocation
Section: Chapter Questions
Problem 4TY
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Part a, b, c
Transcribed Image Text:This problem deals with the effects of taxation. Suppose that the market demand curve for a good is given by P
100 Q and that the market supply curve is given by P
10Q
On a piece of paper, graph these curves.
a) Set the P values equal using the above formulas, and solve for Q to find the equilibrium quantity, at which the supply and demand curves intersect. The equilibrium quantity is given by Q
Substitute this value back into the demand
function to find the equilibrium price, which is given by P .
b) Now suppose that a tax of $1 per unit is levied on each unit of output. As a result, the market supply curve shifts up by one unit. The curve is now given by P = 11 Q
Repeating the steps of part (a), the new equilibrium quantity is Q
and the equilibrium price is P (include one digit following the decimal point). Comparing the P value to that from part (a), the $1 tax has led to a price increase of
cents. Illustrate this outcome in your diagram.
c) Suppose instead that the market demand curve is given by P = 100 - 3Q. This curve is
O A. flatter
O B. steeper
than the curve from part (a). Assuming that no tax is present, so that the supply curve is once again P 10 Q, compute the equilibrium quantity and price in the market. These values are given by Q
and P (include one digit
following the decimal point).
d) Now reimpose the $1 tax, so that the supply curve is P
(include two digits following the decimal point). In this case, the $1 tax has led to a price increase of
and P
11 Q. The new equilibrium quantity and price values are Q
cents.
e) Based on the above answers, you can conclude that, when demand is less price sensitive (when the demand curve is steeper and thus more inelastic), the share of a tax passed on to consumers in the form of a higher price is
O A. smaller
O B. greater
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