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Econ Notes Exam 2 - Economics Exam 2 Chapter 7 Practice...

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Economics Exam 2 Chapter 7 Practice Problems: 1-3, 5-10, 13, 16, 19, 22, 24-26 A. Incidence of Taxation 1. Motivation 2. Tools a. Elasticity - Price elasticity of supply and price elasticity of demand. How sensitive buyers and sellers are. b. Economic surplus- Something extra over and above; the operation of a market system= goods and services exchanged for money. Economic surplus is a rationality of quantity. Economic surplus will increase is demand becomes more inelastic. How elastic we are to price will determine how beneficial we are to trade. Economic surplus is Consumer surplus + Producer surplus. If it is positive then this is beneficial. i. Consumer surplus: Something extra which accrues to the buyers from engaging in a market transaction. Consumer surplus (C S ) = Reservation price (the maximum price you are willing and able to pay for a unit of a good)-Actual price (what you have to actually pay for the good. The left over is called net gain. Ex. You are buying orange juice and it only cost $2 and you are willing to pay $5, you now have surplus. - Rational: You would buy something if the net gain was greater to or equal to zero. -Look at notes on 9/23 ii. Producer surplus: Something extra which accrues to the seller from engaging in a market transaction. Producer Surplus (P S ) = Actual price- Reservation Price. Actual price is the price they are getting and the reservation price is the minimum they are willing and able to accept. -Also look at notes on 9/23 iii. Government revenue= Ex. 9% tax on goods. If something cost $10.90, Wal Mart gets 10 dollars and the government gets the 90 cents because it is a tax. - Tax: When we introduce government intervention, economic surplus is that which goes to the buyer, seller, and the government. So Economic surplus= Consumer surplus + Producer Surplus + Government Revenue - Ex. Excise tax. The government revenue= the amount of the tax X the quantity of the good - -When we introduce tax, the amount of tax= price the buyer pays- price the seller receives - Both the buyer and seller have to pay for the tax. The buyers have to pay an actual large price where sellers have to pay because demand goes down and buyers buy less. iv. Deadweight loss v. Examples 3. Examples a. Who bears the burden of a tax? b. How is economic surplus affected? (On notes below)
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Chapter 9 Practice Problems: 1, 3, 4, 6, 7, 11, 12-14, 16-18 A. Incidence of taxation 1. Tools a. Economic surplus- no matter which side of the market a tax is attached to, both sides of the market (seller and buyer) bear part of the burden. i. Deadweight loss: This is net loss of economic surplus as a result of a tax. This doesn’t mean that it is the taxes fault; it is only because the amount of economic activity declined. The less quantity declines the less loss, the more declines, the more loss. Deadweight loss is a function of three variables.
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