4. (15 points) Consider the competitive market where demand is P = 20 .25Q and s

Question

4. (15 points) Consider the competitive market where demand is P = 20 .25Q and supply is P = 3 + .5Q.

a. Analyze the effects on the equilibrium quantity, producer price Pn, and consumer price Pg of a $1 per unit tax on producers. What is the tax revenue?

b. Analyze the effects on the equilibrium quantity, producer price Pn, and consumer price Pg of a 20% ad valorem tax on producers. What is the tax revenue?

c. Analyze the effects on the equilibrium quantity, producer price Pn, and consumer price Pg of a $1 per unit subsidy to consumers. What is the cost to the government?

5. (15 points) In Chapter 3 of Taxing Ourselves, Slemrod and Bakija explain that economists have two principles for determining the fair distribution of the tax burden across income classes.

What are these two principles? Explain each of them in your own words.

In your opinion, how does Margaret Thatcher’s poll tax stack up using these two principles?

Consider Table 3.1. Summarize the evidence on the degree to which U.S. federal taxes and transfers have affected income inequality.

Explanation / Answer

C.At equilibrium Qd=Qs

20-5P=2P-2

7P=22

P=3.14

Q=2(3.14)-2

Q=4.28

D.Ed=(dQd/dP)*P/Q

Q=20-5P

dQ/dP=-5

Ed=-5*(3.14/4.28)

Ed=-3.67

Qs=2P-2

dQ/dP=2

Es=(dQ/dP)*P/Q

Es=2*(3.14/4.28)

Es=1.46

Since elasticity of demand is greater than elasticity of supply,producers will bear more burden of the tax.Lesser the elasticity,higher the burden.

Only first 4 questions can be answered if a question has multiple sub parts.

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