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EC120 Chapter Notes - Chapter 8: Black Market, Tax Rate, Deadweight Loss

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School
WLU
Department
Economics
Course
EC120
Professor
Hideki Ariizumi

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Document Summary

Ec120: chapter 8 application: the costs of taxation. When tax is levied on buyers, demand curve shifts downward by size of the tax. When tax is levied on sellers, supply curve shifts upward by that amount. Tax places a wedge between the price buyers pay and the price sellers receive. Because of tax wedge, quantity sold falls below level that would be sold without tax: tax on good causes size of market for the good to shrink. Benefit buyers receive in a market is measured by consumer surplus (amount buyers are willing to pay for the good minus amount they actually pay) Benefit sellers receive is measured by producer surplus (amount sellers receive for good minus costs) Government gets total tax revenue of t x q. T: size of tax; q: quantity of good sold. Use tax revenue to provide services (road, police, education)

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Related Questions

Suppose that a market is described by the following supply and demand equations:

QS= 2P

QD = 300P

a. Solve for the equilibrium price and the equilibrium quantity.

b. Suppose that a tax of T is placed on buyers so the new demand equation is QD = 300 (PT). Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?

c. Tax revenue is T×Q. Use your answer to part (b) to solve for tax revenue as a function of T. 
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 , solve for deadweight loss as a function of T. 

(Hint: Looking sideways, the base of the deadweight loss triangle is T, and the height is the difference between the quantity sold with the tax and the quantity sold without the tax.)

 

Suppose you are hired by the Martin guitar company as an economic consultant. You estimate the demand for Martin guitars to be Q = 8000 - 2P. Suppose the supply of Martin Guitars is given by Q = -2000 +3P. What is the equilibrium price of Martin guitars?

  1. What is the equilibrium quantity of Martin guitars?
  2. What is the price elasticity of demand at the equilibrium price and quantity?
  3. What is the price elasticity of supply at the equilibrium price and quantity?
  4. For the next seven questions, suppose a per-unit excise tax of $40 per guitar is levied on the consumers.
  • What price will sellers receive after the tax is levied?
  • What price will consumers pay after the tax is levied?
  • What percent of the tax will be paid by the consumers of Martin guitars? (give an answer between 0 and 100)
  • What percent of the tax will be paid by the suppliers of Martin guitars? (give an answer between 0 and 100)
  • How many guitars will be sold after the tax is imposed?
  • How much consumer surplus do consumers get after the tax?
  • What is the deadweight loss created by this tax?

The market for packets of cigarettes has been described by the following supply and demand functions:

Supply: P = 10 + 4Q Demand: P = 100 - 5Q where P is the price in dollars and Q is the quantity of packets of cigarettes per month (in thousands).

Part A) Construct a graph of supply and demand for this market showing all intercepts. What are the equilibrium prices and quantities? Show these on your graph.

Part B) At the market equilibrium price, what would be the total monthly revenue?

Part C) Calculate consumer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part D) Calculate producer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part E) Assume that a per-unit tax of $9.00 per packet of cigarettes is imposed by the government on the suppliers of cigarettes. Depict this on your demand and supply diagram. (Hint: the new tax inclusive supply function will be: P = 19 + 4Q). What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive?

Part F) How much is the government revenue from the tax on suppliers?

Part G) Calculate consumer surplus and producer surplus after the imposition of the tax and any deadweight loss associated with the tax. Indicate these surplus and tax revenue areas on your diagram. Explain what the deadweight loss represents.

Part H) Now assume that instead of imposing a per-unit tax of $9.00 per pack on the suppliers of cigarettes the government decides to apply the same per-unit tax of $9.00 on consumers. Depict this on your demand and supply diagram. (Hint: the new tax inclusive demand function will be: P = 91 - 5Q) What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive? (5 marks)

Part I) How much is the government revenue from the tax on consumers? (1 mark)

Part J) Who bears the greatest burden of the tax in each case, producers or consumers? Does your answer depend on whether the tax is levied on producers or consumers?

I am really having difficulty understanding Part J - can that please be answered with some detail?