Econ Exam 2 Notes

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

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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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iv. Deadweight loss: Net loss of E.S. as a result of tax “Welfare” Burden of Tax: Lost consumer/producer surplus Area under curve; see graph Function of 3 variables DL = f[size of tax(+); E S (+); E D (+)] Loss to buyer/consumer is less than or equal to gain by government Change is the same or lower without the tax High tax on inelastic goods; will not get a big change in Q* % of Tax paid by Buyer = [E S / E S + E D ]*100 % of Tax paid by Seller= [E D / E S + E D ]*100 Tax: Increase buyer price, buy less; sellers sell less 3. Examples 1) E S =2.5; E D = 1.5; Excise Tax = $1.00 Buyer pays (5/8ths) 62.5%; Seller pays (3/8ths) 37.5% Buyer bears bigger burden because more INELASTIC in demand 2) If both 50%, the elasticities are equal 3) EBAY “no shipping” Reservation Price = $50 (DOES NOT CHANGE) Winning bid = $50 Price of Buyer = $50 Price of Seller = $50 EBAY “seller pays $10 shipping” Winning bid = $50 Price of Buyer = $50 Price of Seller = $40 (-$10 to UPS) EBAY “buyer pays $10 shipping” Winning bid = $40 (+$10 to UPS) Price of Buyer = $50 Price of Seller = $40 (Seller holds burden) a. Who bears the burden of a tax? SIDE WHICH IS RELATIVELY MORE INELASTIC WILL BEAR LARGER BURDEN OF TAX b. How is economic surplus affected? A.
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Econ Exam 2 Notes - I. BUSINESS A. Practice Problems...

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