Problem Set 1 - Due Problem Set 1 Economics 231 Fall 2005...

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Problem Set 1 Due: September 13, 2006 Economics 231 Fall 2005 Professor John Conley Vanderbilt University 1. The government currently places a .25 per package tax on cigarette purchases, and in addition has a .50 per package tax excise tax paid by the firms. The government is going to increase the tax by .40. True, false or uncertain: the tobacco companies would be well advised to lobby the government to place this tax on consumers. Illustrate your answer in a picture where you show the differences between increasing the consumer tax .40 and the producer tax .40. 2. It is often said that you can save money by cutting out the middleman. What role to the middlemen play in the economy? Are they parasites or do they contribute the economic efficiency? Try to discuss this question by making specific reference to the issues that we talked about in class. 3. Suppose that the demand for iPods is given by the following equation: 2000 5 d c q p = where q d is the quantity demanded, and p c is the consumer price. Also suppose that the supply of roller skates is given by 6 100 s p q p = where q s is the quantity supplied, and p p is the producer price. a. Solve for the equilibrium quantity, producer price, consumer price and nominal price. b. Suppose that a $10 per unit tax is placed on the producer. Solve for the new equilibrium quantity, producer price, consumer price and nominal price c. What would change (if anything) to your answer in part (b) if the tax had been placed on the consumer instead?
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