midterm-1 - out-of-State firms are out-of-State residents...

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Economics 150 Midterm Exam January 23, 2003 Most U.S. States now face large budget deficits. One common reaction in the past to such budgetary pressures has been to raise “sin” taxes, such as those on alcoholic beverages. Price Bottles 1) To begin with, describe the market equilibrium without taxes for alcoholic beverages. 2) In fact, alcoholic beverages have in the past been subject to a $t per bottle tax rate. Describe on the above graph the resulting changes in market-clearing prices faced by consumers and firms, the quantity consumed, the welfare of consumers and producers, the revenue raised from the tax, and the resulting excess burden. 3) A large fraction of the alcohol consumed in any State is imported from other States, or even from abroad. Assume the supply of imports is upward sloping, as is the supply of domestically produced alcohol, and for simplicity assume that workers and owners of
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Unformatted text preview: out-of-State firms are out-of-State residents as well. Describe the net gains and losses to residents in the State from this tax on alcohol? 4) What if the tax rate were now doubled? Show on a graph the resulting changes in prices, quantity consumed, welfare of consumers and producers, tax revenue, and the excess burden? 5) In each case, how do the changes described in question 4 compare in size to those described in question 2? For example, if they are equal, then the overall changes would be twice as large if the tax rate were twice as high. Are they? Does tax revenue, for example, necessarily increase? Why? 6) How else might the utility of individuals, and government revenue, be affected by this tax increase? Why? Demand Supply...
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