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Unformatted text preview: Economics 1480 Answer key #6 1) Rosen Chapter 14: problem 5 a) Before-tax equilibrium: P = $10 and Q = 300,000 Q D =Q S 500,000-20,000P=30,000P 500,000=50,000P P=10 Q=30,000*10=300,000 After-tax equilibrium: P = $10.60 and Q = 288,000, producers receive $9.60 500,000-20,000P=30,000(P-1) 530,000=50,000P P=10.6 Q=30,000*(10.6-1)=288,000 b) Revenue = $288,000. Consumers bear 60 percent of the tax burden and producers bear 40 percent. So, $172,800 comes from consumers and $115,200 from producers. c) With a more elastic demand curve, quantity consumed will decrease even more as a result of the tax, so the liquor tax will be more effective at reducing consumption among young drinkers. 2) Equation (15.4) computes the excess burden of a tax on labor, which equals ½ ε wL 1 t 2 . Thus, when taxes are lowered from 39.9% to 34%, the ratio of the excess burden triangles differs only by the last term, the square of the tax rate. Thus, (34/39.9) 2 =.726. So, under the new regime, excess burden is only 72.6 percent of the excess burden under the old regime. 3) This problem investigates (in more detail) the example of perfect substitutes...
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- Spring '10
- Economics, Substitute good, excess burden