homework_assignmentPF2008_II_answers

homework_assignmentPF2008_II_answers - ISM Public finance...

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ISM Public finance 2008 Homework assignment #2 Answers 1 20 points The supply of newspapers is perfectly elastic at a price of $0.75. Sketch the supply and demand graph below and calculate the equilibrium number of newspapers demanded by consumers in this market assuming the quantity demanded is given by the function: Q D = 864,000 – 512,000P Suppose that a 20 percent tax is imposed on newspapers, causing the after-tax price to increase to $0.9. Show the effect of this tax in your graph (label the new supply line S’) and calculate the excess burden resulting from the tax. Calculate the price elasticity of demand coefficient at the initial equilibrium point using the formula ε D = |( Δ Q D / Δ P)(P/Q D )| and use this value to verify that the excess burden can also be calculated using the formula EB = ½ ε D (PQ)t Please note, that you can get the same result by moving demand curve, however you can’t move both the curves together.
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2. 20 points a) Knowing the formula of excess burden S=1/2P x g x t 2 x ε you can conclude that if elasticity increases, deadweight loss increases. The result might seem ambiguos if
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