ECO 108 Lecture Notes - Lecture 4: Demand Curve

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peachwoodchuck721

3 Aug 2018

School

University of Rochester

Department

Economics

Course

ECO 108

Professor

landsburg

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Document Summary

A sales tax is a tax that the buyer pays to the government. In practice, the seller often acts as an intermediary, collecting the buyer"s money and handing it over to the government. But the seller"s role is unimportant here; what matters is that the buyer is legally required to pay the tax. The word price refers to the before-tax price. Sales taxes don"t count as part of the price. Because we treat the sales tax as something other than a component of the price, a change in the sales tax can cause a change in demand (not just quantity demanded). To construct the new demand curve, we proceed one point at a time. A sales tax of 10 cents per cup causes the demand curve to shift vertically downward a distance 10 cents. Suppose the government imposes a new sales tax of 10 cents per cup of coffee. The demand curve drops vertically a distance 10 cents.

Related Questions

Suppose the market for widgets can be described by the following equations:

Demand: P = 14 1.00Q
Supply: P = 1.00Q + 6,

Where P is the price in dollars per unit and Q is the quantity in thousands of units. What are the equilibrium price and quantity? The equilibrium quantity is ______ units and the equilibrium price is $______.

Suppose the government imposes a tax of $1 per unit to reduce widget consumption and raise government revenues. What will be the new equilibrium quantity? What price will the buyer pay? What amount will the seller receive?

The new equilibrium quantity will be __________.
The price paid by buyers will be $__________.
The amount kept by sellers will be $__________.

brownalligator960

Suppose the market for widgets can be described by the following equations

Demand: P = 10 – Q

Supply: P = Q – 4

Where P is the price in $ per unit and Q is the quantity in thousands of units. Then

a. What are the equilibrium price and quantity?

b. Suppose the government imposes a tax of $1 per unit to reduce widget consumption and raise government revenues. What will the new equilibrium quantity be? What price will the buyer pay? What amount per unit will the seller receive? What will be the total government revenue?

c. The tax is removed and a subsidy of $1 per unit granted to widget producers. What will the equilibrium quantity be? What price will the buyer pay? What amount per unit will the seller receive? What will be the total cost to the government?

browncrab248

The demand for ice cream is given by Q D = 20 - 2P, measured in gallons of ice cream. The supply of ice cream is given by Q S = 4P - 10. Suppose that the government legislates a $1 tax on a gallon of ice cream, to be collected from the seller.

a) As a result of the tax, what is the price paid by buyers?

b) What is the price received by sellers?

Hint: You need to determine the consumer and producer burden of the tax. First, find the equilibrium price and quantity. Then, determine the elasticity of demand and supply. Then, use the share of the tax formula provided to you to determine the burdens. After, that you add the consumer burden to the equilibrium price to find the buyer price. Subtract the producer burden from equilibrium price to find seller price.

olivemoose752

ECO 108 Lecture Notes - Lecture 4: Demand Curve

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