Suppose that the supply curve is given by QS = a*P + b*w + c*i, where P denotes the price per unit of a supplied good, w the nominal wage per hour and i the interest rate on debt. The demand curve is given by QD = d*P + e*I + f*T, where I denotes annual income per year in thousands of dollars and T is a constant amount of income taxes.
a. Calculate the equilibrium price and quantity for the following estimated parameters, a = 1, b = -2, c = -1/2, d = -2, e = 2, f = -1, and average levels of wages, interest rates, income and taxes, w = 5, i = 0.1, I = 40, T = 6.
b. By how much do the equilibrium price and quantity change, when income taxes increase by 50 percent ? Explain the involved adjustment. Draw a graph to illustrate your answer.
c. Suppose that taxes are proportional to the level of income. Calculate the equilibrium price and quantity for a tax rate of 17.5 percent of income and a tax rate of 35 percent of income. Why a government might have incentives to impose the higher tax rate ?
Suppose that the supply curve is given by QS = a*P + b*w + c*i, where P denotes the price per unit of a supplied good, w the nominal wage per hour and i the interest rate on debt. The demand curve is given by QD = d*P + e*I + f*T, where I denotes annual income per year in thousands of dollars and T is a constant amount of income taxes.
a. Calculate the equilibrium price and quantity for the following estimated parameters, a = 1, b = -2, c = -1/2, d = -2, e = 2, f = -1, and average levels of wages, interest rates, income and taxes, w = 5, i = 0.1, I = 40, T = 6.
b. By how much do the equilibrium price and quantity change, when income taxes increase by 50 percent ? Explain the involved adjustment. Draw a graph to illustrate your answer.
c. Suppose that taxes are proportional to the level of income. Calculate the equilibrium price and quantity for a tax rate of 17.5 percent of income and a tax rate of 35 percent of income. Why a government might have incentives to impose the higher tax rate ?
