Econ Problem set 4.pdf

# Econ Problem set 4.pdf - Problem Set#4 Name Tony Kim Date...

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Problem Set #4 Name: Tony Kim Date: February 14th, 2018 Chapter 8 1. The market for pizza is characterized by a downward-sloping demand curve and an upward- sloping supply curve. a. Draw the competitive market equilibrium. Label the price, quantity, consumer surplus and producer surplus. Is there any dead weight loss? Explain. The graph below shows the equilibrium price and quantity where demand is equal to supply. IN the graph, the equilibrium shows as P and equilibrium quantity is shown as Q1. The area A+B+C is conveyed as CS and the area D+E+F is shown as PS. Finally the Total surplus are is under the area of (A+B+C+D+E+F), this means, there is no deadweight loss under the market. b. Suppose that the government forces each pizzeria to pay a \$1 tax on each pizza sold. Illustrate the effect of this tax on the pizza market. being sure to label the consumer surplus, producer surplus, government revenue and deadweight loss. How does each area compare to the pre-tax case?

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Suppose that the government forces each pizzeria to pay a \$1 tax on each pizza sold. this will lead to decrease in the consumer surplus, and producer surplus. In the graph, it is revealed that as P increases from P to Pb, the area under consumer surplus and producer surplus will decrease. Now, the consumer surplus is A, and the Producer surplus if F. Government revenue area B+D, and the deadweight loss area is C+E. c. If the tax were removed, pizza eaters and sellers would be better off, but the government would lose tax revenue. Suppose that consumers and producers voluntarily transferred some of their gains to the government. Could all parties (including the government) be better off than they were with a tax? Explain using the fabled areas in your graph. If the tax were removed, then the consumers and producers and produces would be better off when some part is voluntarily transferred to the tax revenue. The equilibrium price is P and quantity is Q1, as in the case without tax. Now, the consumer surplus area is A+B+C. Thus, the part B is voluntarily transferred to the government, and producer surplus is D+E+f. Thus, the part D is voluntarily transferred to the government. If consumers and producers transfer a little bit more than B+D, then all the tree parties will be better off. This situation is called inefficiency of taxation. 2. Evaluate the following two statements. Do you agree? Why or why not? a. “A tax that has no dead weight loss cannot raise any revenue for the government.” I do not agree with the statement. The statement, that says a tax that has no deadweight loss cannot raise any tax revenue for the government is incorrect. This is explained by taking the following example of a perfectly inelastic supply or demand curve. For example, in the case of perfectly inelastic supply or demand curve, the curves are vertical and the quantity supplied remains constant at any price level; further more, the dead weight loss will also be zero as the curves are vertical. However, there will be positive tax revenue collected as the tax revenue is
collected on the number of units sold. Therefore, a tax having no dead weight loss can collect

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