pubsec-ex3

pubsec-ex3 - BRANDEIS UNIVERSITY Department of Economics...

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BRANDEIS UNIVERSITY Department of Economics Econ 134 Mr. Coiner Public Sector Spring, 2009 Third Exam 1. The elasticity of demand for rutabagas (a really bad-tasting vegetable) is one (strictly speaking, a mathematician would say it is -1) and the elasticity of supply is three. Initially there is no sales tax on rutabagas, and market equilibrium occurs at a price of $5 per pound and a quantity of 1000 pounds per week. Then the government enacts a $2 per pound sales tax on rutabagas. a) With this tax in place, what price per pound will producers receive? b) What is the dead weight loss of this tax? 2. Suppose you have just earned $1000 that you do not need to spend this year—you are able to save it for a year. You could place it in a regular savings account, or you could place it in an IRA where you will not be taxed until you withdraw your money. The interest rate in either account is ten percent. Your tax rate is thirty percent. If you put the money in the regular savings account, you must pay taxes on it right away (before you even make the deposit). Next year, you will only be taxed on the interest payment from this account. On the other hand, if you put the money in an IRA, you can put it all in. When you withdraw it (WHICH WILL BE NEXT YEAR) you pay a tax on the entire withdrawal. a) If you choose the regular savings account, how much will you end up with next year (after paying next year’s taxes)? b) If you choose the IRA, how much will you end up with next year (after taxes)? 3.
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pubsec-ex3 - BRANDEIS UNIVERSITY Department of Economics...

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