PS 05 Key - ANSWERS TO PROBLEM SET 5 - Economics 335 J....

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ANSWERS TO PROBLEM SET 5 - Economics 335 J. Wissink - Cornell University 1. a. See diagram below. On the left, the tax is levied on the suppliers and on the right, demanders. (Note: T=true and M=market) The price demanders pay and the price suppliers receive, after imposition of the tax, is independent of how the tax is collected. b. False. See the graph below. The economic price incidence will still depend on the elasticity of the demand curve relative to the shape of the marginal cost curve. Notice I didn't say "supply curve" because a monopolist really has no well-defined supply curve. Note that in this graph, the increase in the monopolist's price to demanders is less than the amount of the tax. c. Not quite. The young are saving to smooth out their own consumption including their own consumption when they retire. By giving their savings to the current old we may not have a welfare improvement, especially if economic and demographic conditions have changed for the worse by the time the current young are retired. If the system crashes or there are not enough working people producing enough national income to support these now retired people at levels equal to what their
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2 savings would have allowed had their savings not been given to the current old at the time, then there would not be a Pareto improvement. 2. If X D =100-2P and X S =3P, then the equilibrium is where demand=supply. Setting the two quantity functions equal we get: 100-2P*=3P* so that 5P*=100 or that P*=$20 and therefore X*=60. Now if you have a $4 per unit tax, collected equally from suppliers and demands you factor the statutory
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PS 05 Key - ANSWERS TO PROBLEM SET 5 - Economics 335 J....

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