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HOOct06 - Economics 201 Witte Tuesday October 6 2005 New...

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Economics 201, Witte, Tuesday, October 6, 2005 New quiz will cover: o On Aplia: Chapter 4, Problem Set II o In TA section you will have to drawing an effective price ceiling or price floor (Note: “effective” need not mean that the effect is a good one) TA office hours and discussion groups posted on courses.northwestern.edu. Be a Kellogg research subject ($$$) http://www.kellogg.northwestern.edu/faculty/lee/marketingstudy.html Surplus, Taxes, & Dead Weight Loss (DWL) I. Supply & Demand curves represent people, and people buying things from other people creates a surplus (a benefit to both buyers and sellers) for everyone who isn’t right on the margin of indifference. II. Dead Weight Loss = Failure of market to take advantage of all beneficial gains from exchange. DWL can come from market failures or taxation. III. Taxes can be thought of as shifting the supply curve upward or to the left. IV. This generates tax revenue equal to (tax rate * new equilibrium quantity) V. This creates dead weight loss, a loss of consumer and producer surplus equal to (0.5*tax rate*change in equilibrium quantity) VI. Example: a. Before tax, P = $20, Q = 100. b. With $5 tax, Gross price = $23 (price paid by demanders), Net price = $18 (price received by suppliers after the tax), Q’ = new equilibrium Q = 90. Tax revenue = tax*Q’ = $5*90 = $450. DWL = 0.5*$5*(100-90) = $25 c. With $10 tax, Gross price = $26 (price paid by demanders), Net price = $16 (price received by suppliers after the tax), Q’ = new equilibrium Q = 80. Tax revenue = tax*Q’ = $10*80 = $800.
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