Econ Exam 2 Notes

# Econ Exam 2 Notes - I BUSINESS A Practice Problems Chapter...

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I. BUSINESS A. Practice Problems Chapter 8: 1, 3, 7-13, 16, 20 Chapter 12: 1-3, 7-10, 12, 15 Chapter 14: 1-5, 7, 8, 10, 11, 13-15, 20 Chapter 15: 1-3, 6-8, 11-14 Chapter 16: 1-8, 10, 14, 15 II. SUBSTANCE A. Incidence of taxation: Reduce Quantity Transacted 1. Motivation: \$0.05 tax increase is shared between buyer and seller; doesn’t matter who is taxed; who is burdened? Buyer pays \$0.03 more (slightly more price inelastic) Seller receives \$0.02 less Examples: Sales tax: collected from buyer Gas station: pay price on gas pump; collected from seller; built into the price you see 2. Tools: a. Elasticity : Magnitude of response to tax b. Economic surplus : Total net benefit to society of engaging in market exchange In absence of government, ES = CS + PS i. Consumer surplus: net benefit of buyers for engaging in market exchange ii. Producer surplus: net benefit of sellers for engaging in market exchange Surplus = Benefit – Cost ; Rational if Surplus is > or = to zero C.S. = Reservation Price – Actual Price P.S. = Actual Price – Reservation Price ΔQ* is the only facor in ΔE.S. (Price is irrelevant) Price irrelevant because every dollar spent is another earned; cancels out Increase Demand Δ C.S. Δ P.S. Δ E.S. Increase P* Bad Good IRRELEVANT Increase Q* Good Good Good (Increases) Δ Ambiguous Increase Increase iii. Government revenue: taxes G.R. = Net benefit to government ES = CS + PS + GR Tax creates 2 different P*’s: The price the buyer pays is not the same as the price the seller receives Tax Amount = Price paid by Buyer – Price of Seller G.R. = Tax Amount*Q

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