kf008 - 1 Ka-fu Wong University of Hong Kong The Quest for...

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Unformatted text preview: 1 Ka-fu Wong University of Hong Kong The Quest for Profit and the Invisible Hand 2 Example 8.1. For the supply and demand curves shown, suppose a tax of $6/lb is levied on sellers. What share of the burden of this tax be borne by buyers? By sellers? Price ($/lb) Quantity (millions of lb/month) D S 12 18 6 18 3 Example 8.1. The equilibrium price, including the tax, will rise from $6/lb to $10/lb. Price ($/lb) Quantity (millions of lb/month) D S S + 6 12 8 18 10 6 4 18 Sellers receive $4/lb (net of the tax), $2 less than before. So the sellers share of the tax is (6-4)/6 = 1/3. Buyers pay $10/lb (including the tax), $4 higher than before. So the buyers share of the tax is (10-6)/6 = 2/3. (as seen by the buyers) 4 Example 8.2. How would your answers to Example 8.1 have been different if the tax had been collected from buyers instead of sellers? 5 Example 8.2. At a quantity of 8 million lb/month, the buyer is willing to pay $10/lb. With a tax of $6/lb, the most he would be willing to pay the seller, net of the tax, is only $4/lb. So the demand curve as seen by the sellers is the original demand curve shifted down by $6/lb. Price ($/lb) Quantity (millions of lb/month) D 12 8 18 10 6 4 18 12 Demand with $6/lb tax 6 Example 8.2. Price ($/lb) Quantity (millions of lb/month) D S 12 8 18 10 6 4 18 12 So, as before, the buyer pays $10/lb and the seller receives $4/lb in equilibrium. As before the buyers share of the tax is 2/3 and the sellers share is 1/3. 7 Example 8.3. If the supply curve is completely elastic, what share of a tax of $1/lb is borne by buyers? By sellers? Price ($/lb) Quantity (millions of lb/month) D 2 1 3 2 1 3 S To get an answer for this question, do we need to consider the two possibilities? 1. Tax collected from the buyers 2. Tax collected from the sellers 8 Example 8.3. For this empirically most relevant case, the tax is borne entirely by buyers. Price ($/lb) Quantity (millions of lb/month) D S+ 1 2 1 3 2 1 3 S When supply is perfectly elastic, taxing sellers because they can afford the tax more easily than buyers makes no economic sense at all. The burden of a tax falls where it can, not where it is placed. 9 Different Types of Profit Profit = Total revenue - Total cost Accounting profit = Total revenue - Explicit costs Economic profit = Total revenue - All costs (implicit and explicit) Normal profit = the opportunity cost of the resources owned by the firm 10 Different Types of Profit Total Revenue Explicit costs Accounting profit Explicit costs Economic profit Normal profit Opportunity cost of resources supplied by owners of firm 11 Example 8.4....
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kf008 - 1 Ka-fu Wong University of Hong Kong The Quest for...

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