# PS2_Solutions.pdf - PROBLEM SET 2 SOLUTIONS ECON 115 PROF...

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PROBLEM SET 2 SOLUTIONSECON 115 PROF GOLDBERGQuestion 1.Your nameYoursection leadernameTime of assigned sectionQuestion 2a)Equilibriumin a market is defined as the state in which the quantity supplied is equal to thequantity demanded.b)Tax Incidenceis defined as who really bears the burden of a tax. It is the portion of the tax paidby buyers and sellers. For sellers, the tax burden is measured by the difference between the pricesellers received for the good-before the tax-and the price they receive for the good after the tax,times the quantity sold after the tax. For consumers, the tax burden is measured by the differencebetween the equilibrium price before the tax and the price buyers pay for the good after the tax,times the quantity consumed after the tax.c)Social Surplusis defined as the surplus/benefit to society generated due to an economictransaction. It is equal to the private surplus/benefit plus the external surplus/benefit.d)Elasticityis the ratio of the percentage change in one value to the percentage change in another.In the course we talk about price elasticity of demand. The price elasticity of demand is thepercentage change in quantity demanded for a 1% change in price. A demand is inelastic when itselasticity magnitude is less than 1.
Question 3If the demand for cigarettes is inelastic, then the percentage change in quantity demanded after the taxwill not change a lot. Therefore, the government would like that the demand curve is elastic. The followinggraph illustrates that. There are two demand curves.Demand curve D1 represents a situation where the demand for cigarettes in the market is more inelastic.Demand curve D2 represents a situation where the demand for cigarettes in the market is more elastic.

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