HW4_spring08 - where demand is inelastic. The supply is the...

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HW #4 Economics 304K: Principles of Microeconomics Prof. Meg Ledyard Due Thursday, March 27, 2008 (25 Points total) Remember to type the homework except for charts and graphs. In order to get full credit, you must show all of your work. Homework is due in class on the date listed above. Question 1 (13 points): Suppose that government wants to tax the demanders of aspirin. The market for aspirin is perfectly competitive. a. (7 points) In a clearly labeled diagram, show the market for aspirin when demanders are taxed. Please include the prices that the buyers and sellers pay after the tax and the quantities. Include the consumer surplus, producer surplus, government revenue and dead weight loss after the tax. b. (3 points) Suppose that the demand is more inelastic than supply. Who bears the bigger burden of the tax? How do you know? c. (3 points) Consider two markets, one where demand is elastic, and one
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Unformatted text preview: where demand is inelastic. The supply is the same for both markets, and the pre-tax equilibrium quantities and prices are the same in both markets. Which market will produce more government revenue, the one with elastic demand or inelastic demand? Question 2 (12 points) Consider the perfectly competitive market for tulips in Pizzaland. The government of Pizzaland is trying to decide whether or not to open the tulip market to trade. a. (7 points) In a clearly labeled diagram, show the effects on the market for tulips in Pizzaland if the world price is higher than the no trade price. Label prices, quantities, consumer surplus, producer surplus, government revenue after free trade. b. (3 points) Who benefits and who loses from free trade in the market for tulips? c. (2 points) Who has comparative advantage in tulips, Pizzaland or the rest of the world?...
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