Problem_Set_6_Answers

Problem_Set_6_Answers - 130 CHAPTER 6. EXCISE TAXES Answers...

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130 CHAPTER 6. EXCISE TAXES Answers to Problems on Excise Taxes and Competitive Markets. Answer to Problem 6.1. You observe that a buyer pays $11 · 40 to a seller for one box of chocolates. You know that there is an excise tax of $2 · 30 per box levied on boxes of chocolates. What price did the seller receive for the box of chocolates? Answer. $11 · 40 - $2 · 30 = $9 · 10 per box. Answer to Problem 6.2. In a market for lumber the price currently paid by buyers is $3 per foot. The price received by the sellers of lumber is $2 · 50 per foot. The market is subject to an excise tax levied at what rate? Answer. The tax rate t = $3 - $2 · 50 = $0 · 50 per foot. Answer to Problem 6.3. A market for milk is subject to an excise tax levied at a rate of $2 per gallon. At present the price that a buyer must pay for each gallon is $6 · 40. (i) What is the price received by the sellers? Answer. p s = $6 · 40 - $2 = $4 · 40 per gallon. (ii) At the price currently faced by buyers the quantity of milk demanded is 2000 gallons while the quantity of milk that is supplied at the price received by sellers is 1600 gallons. What will happen to the values of these two prices? Answer. Since the quantity of milk demanded exceeds the quantity of milk supplied, there is an excess quantity demanded for milk. Consequently the price p b that buyers will pay for milk will rise. The price received by sellers is p b less the $2 tax, so p s will rise by the same amount as p b . Answer to Problem 6.4. Compact discs are sold in a competitive market. When buyers pay p b for each disc the total number of discs demanded is Q D = 50 - p b . When sellers receive p s for each disc the total number of discs supplied is Q S = - 10 + 4 p s . (i) If the market is not subject to an excise tax, then what is the relationship between p b and p s ? Answer. p b = p s . (ii) If the market is not subject to an excise tax, then what price will buyers pay per disc, what price will sellers receive per disc and how many discs will be traded? Answer. Market equilibrium requires that quantity demanded and quantity supplied are equal; that is, Q D = 50 - p b = - 10 + 4 p s = Q S p b = p s = $12 per disc. The quantities demanded and supplied at a price of $12 per disc are both 38 discs so this is the quantity that will be traded. (iii) The Government imposes a $5 per disc excise tax. What now is the relationship between p b and p s ?
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131 Answer. p b = p s + $5. (iv) When the market is subject to the excise tax, what price will buyers pay per disc, what price will sellers receive per disc and how many discs will be traded? Answer.
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Problem_Set_6_Answers - 130 CHAPTER 6. EXCISE TAXES Answers...

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