101-15_07 - Economics 101 Lecture 15 Example 15.1 For the...

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Economics 101 Lecture 15 Example 15.1 . For the supply and demand curves shown, suppose a tax of $6/lb is levied on sellers. What share of the burden of this tax be borne by buyers? By sellers? Price ($/lb) Quantity (millions of lb/month) D S 0 12 18 6 18 The equilibrium price, including the tax, will rise from $6/lb to $10/lb. Sellers receive $4/lb net of the tax, $2 less than before. So the buyers’ share of the tax is (10-6)/6 = 2/3, and the sellers’ share is (6-4)/6 = 1/3. Price ($/lb) Quantity (millions of lb/month) D S 0 S + 6 12 8 18 10 6 4 18 Example 15.2 . How would your answers to Example 15.1 have been different if the tax had been collected from buyers instead of sellers? Using the vertical interpretation of the original demand curve, note that at a quantity of 8 million lb/month, the buyer is willing to pay $10/lb. With a tax of $6/lb, the most he would be willing to pay the seller at 8 million lb/month is only $4/lb. So the demand curve as seen by the sellers is the original demand curve shifted down by $6/lb. Price ($/lb) Quantity (millions of lb/month) D 0 12 8 18 10 6 4 18 12 Demand with $6/lb tax Price ($/lb) Quantity (millions of lb/month) D S 0 12 8 18 10 6 4 18 12 So, as before, the buyer pays $10/lb and the seller receives $4/lb in equilibrium. As before the buyers’ share of the tax is 2/3 and the sellers’ share is 1/3. Example 15.3 . If the supply curve is completely elastic, what share of the tax is borne by buyers? By sellers? For this empirically most relevant case, the tax is borne entirely by buyers. When supply is perfectly elastic, taxing sellers “because they can afford the tax more easily than buyers” makes no economic sense at all. The burden of a tax falls where it can, not where it is placed.
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2 Price ($/lb) Quantity (millions of lb/month) D S+ 1 0 2 1 3 2 1 3 S   Different Types of Profit Profit = Total revenue - Total cost Accounting profit = Total revenue - Explicit costs Economic profit = Total revenue - All costs (implicit and explicit) Normal profit = the opportunity cost of the resources owned by the firm Example 15.4 . Cullen Perot runs a miniature golf course in Odessa, Texas. He rents the course and equipment from a large recreational supply company, for which he pays a monthly fee of $1000. He supplies his own labor, and considers the job of running the golf course just as attractive as his only other employment opportunity, working in a grocery store at a salary of $800/mo. Monthly revenue from ticket sales is $2000/mo. What at is Cullen's accounting profit?
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101-15_07 - Economics 101 Lecture 15 Example 15.1 For the...

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