PROBLEMS AND APPLICATIONS
1. The market for pizza is characterized by a downward-sloping demand curve and an upward-sloping supply curve a Draw the competitive market equilibrium. Label the price, quantity, consumer surplus, and producer surplus. Is there any deadweight loss? Explain.
b. Suppose that the government forces each pizzeria to pay a $1 tax on each pizza sold. Illustrate the effect of this tax on the pizza market, being sure to label the consumer surplus, producer surplus, government revenue, and dead weight loss. How does each area compare to the pretax case?
c. If the tax were removed, pizza eaters and sellers would be better off, but the government would lose tax revenue. Suppose that consumers and producers voluntarily transferred some of their gains to the government. Could all parties (including the government) be better off than they were with a tax?
Explain using the labeled areas in your graph.
2. Evaluate the following two statements. Do you agree? Why or why not?
a. “If the government taxes land, wealthy landowners will pass the tax on to their poorer renters,”
b. “If the government taxes apartment buildings, wealthy will pass the tax on to their poorer renters.”
3. Evaluate the following two statements. Do you agree? Why or why not?
a. “A tax that has no deadweight loss cannot raise any revenue for the government.”
b. “A tax that disk no revenue for the government cannot have any dead weight loss.”
4. Consider the market for rubber bands.
a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use the tools of consumer surplus and producer surplus in your answer.
b. If this market has very inelastic supply and very elastic demand, how would the burden of a tax on rubber bands be shared between consumers~ and producers? Contrast your answer with your answer ‘ to part (a)
5. Suppose that the government imposes a tax on heating oil.
a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.
b. Would the revenue collected from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.
6. After economics class one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic. In what sense is taxing food a “good” way to raise revenue? In what is it not a “good” way to raise revenue?
7. Daniel Patrick Moynihan, the late senator from New York, once introduced a bill that would 10,000 percent tax on certain hollow-tipped bullets.
a. Do you expect that this tax would raise much revenue? Why or why not?
b. Even if the tax would raise no revenue, why might Senator Monomania have proposed it? ,
8. The government places a tax on the purchase of socks. Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following areas both before and after the imposition of the tax: total spending by consumers, total revenue for producers, and government tax revenue.
b. Does the price received by producers rise or fall? Can you tell whether total receipts for producers rise or fall? Explain.
c. Does the price paid by consumers rise or fall? Can you tell whether total spending by consumers rises or falls? Explain carefully. (Hint: Think about elasticity): If .total consumer spending falls, does consumer surplus rise? Explain.
9. Suppose the government currently raises $100 million through a 1 cent tax on widgets, and another $100 million through a 10 cent tax on gadgets. If the government doubled the tax rate on widgets and eliminated the tax on gadgets, would .it raise more money than today, less money, or the same amount of money? Explain.
10. This chapter analyzed the welfare effects of -a tax” on a-‘good. Consider now the opposite policy. Suppose that the government subsidizes· a good: For each unit of the good sold, the government.pays $2 to the buyer. How does the subsidy affect consumer surplus, producer surplus” tax revenue, and total surplus? Does a subsidy lead to a deadweight loss? Explain.
11. In the country of Taxopia, the price of a movie ticket is $8 and 3,000 movie tickets a daily.
a. To raise revenue, the government of Taxopia decides to charge movie theaters a ‘x.x of $2 Per ticket sold. After the tax is imposed, the price of a ticket rises to $?.25 and the number Of tickets sold falls to 2,200. Calculate the amount of revenue this tax raises for Tax and the dead weight loss of the tax. (Hint: The area of a triangle is 1/2 X base X height.)
b. The government now decides to double- the tax to $4 per ticket sold. The price rises to $10.50 and the number off all to 1,400. Calculate the- tax revenue and deadweight loss with this larger tax. Do they double, more than double, or less double? Explain.
12. Suppose that the market for tires is desc~bed by the following demand and supply equations:
(? = -500 + 15P
QD = 700 – P
a. Solve for the equilibrium price and quantity of tires.
b. Suppose that a tax of $5 is placed on buyers of tires, so that the new demand equation is
QD = 700 – (P + 5).
Solve for the new equilibrium. Calculate the price received by sellers, the price paid by buyers, and the quantity sold.
c. Tax revenue is $5 X Q. Use your answer in part (b) to solve for tax.
d. The deadweight loss of a tax is the area of the triangle between the supply and demand curves. Recalling that the area of a triangle is 112X base X height, solve for deadweight loss caused by this $5 tax.
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