Homework 4 - 1% change in quantity demanded, in relation to...

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Economics 201 October 19, 2009 Dr. Elliot Homework #4 If the government were to decide that in order to curb high profits being made by the health care industry by imposing a $10 sales tax on producers, I think that it would ultimately hurt consumers the most. This would go against the original goal of minimizing the profits of the producers. If a sales tax was put on the producers, they would bear the burden of the tax. As a result, producers would need to make up for the higher costs that would be implemented. The elasticity of supply on healthcare is elastic, meaning a 1% change in price leads to a greater than 1% change in quantity demanded. Thus, supply would be decreased which would then cause higher costs for consumers – as displayed by the graph below. Therefore, consumers have an inelastic demand, a 1% change in price leads to a less than
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Unformatted text preview: 1% change in quantity demanded, in relation to healthcare. This is because in almost all circumstances, no matter what happens, consumers need health insurance regardless of the expense. The graph below illustrates the more burden falls on consumers due to the more inelastic the burden becomes. In addition, it illustrates that the producer surplus in regard to the lost due to sales tax is less than the consumer surplus lost. In order for the government to make sure that the burden of the tax does not fall on the consumer and rather falls on the producer would be to set a price ceiling. If a price ceiling were to be set at equilibrium before the $10 sales tax would be imposed, then the consumers would not be burdened. This would also guarantee that prices would not rise....
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