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exercise2 - B Impose a unit tax of 40 on the production of...

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1 EXERCISE 2: TAXES For each question below, compute the following: 1. quantity, 2. price, 3. total surplus, 4. profit, or producer surplus, and 5. consumer surplus, 6. the economic incidence of the tax for consumers (i.e., the change in consumer surplus), 7. the economic incidence of the tax for producers, (i.e., the change in producer surplus), 8. government revenues, and 9. the excess burden (i.e., the change in total surplus) I. Assume demand for Q is given by: P = 120-Q Assume cost is given by: C = ½Q 2 Assume there are no externalities and the market is competitive. A. What is the optimal outcome (i.e., the quantity that maximizes total surplus)? B. Impose a unit tax of 40 on the production of Q. C. Impose an ad valorem tax of 50% on the sale of Q. II. Assume demand is given by P = 120-2Q. Assume cost is given by: C = ½Q 2 Assume there are no externalities and the market is competitive. A. What is the optimal outcome (i.e., the quantity that maximizes total surplus)?
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Unformatted text preview: B. Impose a unit tax of 40 on the production of Q. C. What happened to the share of the tax borne by producers and consumers? 2 III. Assume demand is given by P = 120-Q. Assume cost is given by: C = Q 2 Assume there are no externalities and the market is competitive. A. What is the optimal outcome (i.e., the quantity that maximizes total surplus)? B. Impose a unit tax of 40 on the production of Q. C. What happened to the share of the tax borne by producers and consumers? IV. Assume demand for Q is given by: P = 120-Q Assume cost is given by: C = ½Q 2 Assume there are no externalities and there is a single producer, i.e., a monopoly. A. What is the private market outcome (i.e., the profit maximizing outcome)? B. Impose a unit tax of 40 on the production of Q. C. How does the burden of the tax borne by the monopolist compare to the burden borne by the competitive producers in question I?...
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