microeconomics book solution 7

# microeconomics book solution 7 -...

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Solution Taxes 1. The United States imposes an excise tax on the sale of domestic airline tickets. Let’s assume that in 2006 the total excise tax was \$5.80 per airline ticket (consisting of the \$3.30 flight segment tax plus the \$2.50 September 11 fee). According to data from the Bureau of Transportation Statistics, in 2006, 656 million passengers trav- eled on domestic airline trips at an average price of \$389.08 per trip. The accompa- nying table shows the supply and demand schedules for airline trips. The quantity demanded at the average price of \$389.08 is actual data; the rest is hypothetical. a. What is the government tax revenue in 2006 from the excise tax? b. On January 1, 2007, the total excise tax increased to \$5.90 per ticket. What is the equilibrium quantity of tickets transacted now? What is the average ticket price now? What is the 2007 government tax revenue? c. Does this increase in the excise tax increase or decrease government tax revenue? 1. a. Tax revenue is \$5.80 per trip × 656 million trips = \$3,804.8 million. The equilibrium quantity now falls to 655 million, with the price rising to \$389.17. Tax revenue rises to \$5.90 per trip × 655 million trips = \$3,864.5 million. c. The increase in the excise tax increases government tax revenue. 2. The U.S. government would like to help the American auto industry compete against foreign automakers that sell trucks in the United States. It can do this by imposing an excise tax on each foreign truck sold in the United States. The hypothetical pre-tax demand and supply schedules for imported trucks are given in the accompanying table. \$32,000 100 400 31,000 200 350 30,000 300 300 29,000 400 250 28,000 500 200 27,000 600 150 Quantity of imported trucks (thousands) Price of imported truck Quantity demanded Quantity supplied \$389.17 655 1,100 389.08 656 1,000 384.00 685 685 383.28 700 656 383.27 701 655 Price of trip Quantity of trips demanded (millions) Quantity of trips supplied (millions) S-101 7 chapter: S101-S114_Krugman2e_PS_Ch07.qxp 9/16/08 9:21 PM Page S-101

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Solution a. In the absence of government interference, what is the equilibrium price of an imported truck? The equilibrium quantity? Illustrate with a diagram. b. Assume that the government imposes an excise tax of \$3,000 per imported truck. Illustrate the effect of this excise tax in your diagram from part a. How many imported trucks are now purchased and at what price? How much does the for- eign automaker receive per truck? c. Calculate the government revenue raised by the excise tax in part b. Illustrate it on your diagram. d. How does the excise tax on imported trucks benefit American automakers? Who does it hurt? How does inefficiency arise from this government policy? 2. a. The equilibrium price without government interference is \$30,000 and the equi- librium quantity is 300,000, as shown by point E in the accompanying diagram. The effect of the excise tax is illustrated in the diagram: a tax of \$3,000 per truck puts a wedge between the price paid by consumers, or the demand price (\$31,000), and the price received by producers, or the supply price (\$28,000). The quantity bought and sold is 200,000 trucks. The foreign automaker receives \$28,000 per truck (after tax).
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## This note was uploaded on 01/19/2011 for the course ECON 11853 taught by Professor Brianallenhunt during the Spring '10 term at Georgia State.

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microeconomics book solution 7 -...

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