Lecture+8+September+29

Lecture+8+September+29 - Exam next Wednesday Is your Aplia...

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Exam next Wednesday Is your Aplia average above 75%? Can you answer nearly all the problems on the first three Self-Grading Quizzes on Sakai? If you can’t answer both questions with “yes,” you are at risk of underperforming in this class. You need to: Diagnose your problems quickly. Use the Krugman-Wells Study Guide (on Aplia) to improve your understanding in the problem areas you identify. See me or a TA in our office hours. Attend a review session. Today: 4:30 to 5:50 p.m. Frelinghuysen A4 Tomorrow: 4:30 to 5:50 p.m. Scott 202
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Today’s agenda Taxes Who pays a tax? When does taxation have an efficiency cost? What makes a good tax base?
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Cross price elasticity of demand AB A B A A B B = % Q % P = Q Q P P η Δ Δ Δ Δ
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Income elasticity of demand Y = %Q %Y = Q Q Y Y η Δ Δ Δ Δ
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Price elasticity of supply S S S S = % Q %P = Q Q P P η Δ Δ Δ Δ
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Who really pays a tax? legal incidence From whom is the tax is directly collected? vs. economic incidence How is the economic burden of the tax shared?
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Who really pays a tax? Economic incidence is not the same as legal incidence because taxes change prices . These price changes can shift tax burdens from buyers to sellers, or vice versa “upstream” “downstream” Today : focus on buyers v. sellers
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Supply curves: the Marshallian view Usual interpretation “When P = c, quantity supplied is d.” Another view “To be willing to supply d, the minimum price suppliers must receive is c.” Q $/Q S c d
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Demand curves viewed the same way Usual interpretation “When P = c, quantity demanded is d.” Another view “The maximum price at which buyers would be willing to purchase the quantity d equals c.” Q $/Q D c d
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Q $/Q S D P* Q* Market equilibrium, à la Marshall Equilibrium occurs at the quantity at which: the maximum price buyers are willing to pay equals the minimum price sellers insist on receiving
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$t per unit tax, collected from sellers With no tax, sellers must receive $ c per unit in order to be willing to supply d . Q $/Q S c d
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$t per unit tax, collected from sellers With no tax, sellers must receive $ c per unit in order to be willing to supply d . Since sellers must remit $ t to the tax collector, the gross price they must receive is $ c+t . Q $/Q S c d c+t
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$t per unit tax, collected from sellers With no tax, sellers must receive $ c per unit in order to be willing to supply d .
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Lecture+8+September+29 - Exam next Wednesday Is your Aplia...

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