HO_05_201_Sp03 - 3 The graph below shows the market for...

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Cal Poly Pomona, EC 201 Principles of Microeconomics – Professor Brown Handout # 5 1) Draw two “Laffer Curves” on the same graph below. For curve 1, tax revenue decreases as the tax rate is reduced from 50% to 40%. For curve 2, tax revenue increases as the tax rate is reduced from 50% to 40%. Which curve assumes a greater increase in taxable income (“tax base”) because of the lower tax rate? 2) Circle the correct answer: The Laffer curve assumes that as tax rates increase, the tax base: i) Shrinks ii) Grows iii) Is Unchanged iv) It makes no assumption about tax base
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Unformatted text preview: 3) The graph below shows the market for good X, initially with equilibrium quantity, Q X * = 22 and equilibrium price, P * = 12. a) Show the effect of a 6 $/unit sales tax, legally collected from the buyers. b) What is the economic incidence of this tax, per unit, on buyers? c) What is the economic incidence of this tax, per unit, on sellers? d) What is the price elasticity of demand between points A and B? e) What is the price elasticity of supply between points B and C? D S P Q X 16 10 12 22 18 B A C Tax Revenue In $ Tax Rate %...
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