{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# EC111Class6Answers - UNIVERSITY OF ESSEX DEPARTMENT OF...

This preview shows pages 1–3. Sign up to view the full content.

UNIVERSITY OF ESSEX Autumn Term 2011/2012 DEPARTMENT OF ECONOMICS Tim Hatton EC111 Class Exercise 6 Outline Answers 1. (a) A proportional tax at rate t on profits means that net profit differs from gross profit. Net Profit = (1 t) (Gross profit). Since the firm cannot affect the tax rate, t, maximising net profit (which is what the firm gets) is equivalent to maximising gross profit. The firms profit maximising decision (MR = MC) is not altered, so price and output are unchanged. (b) A proportionate tax on revenues means that Net Revenue now differs from Gross Revenue: Net Revenue = (1 t) (Gross Revenue) . From the firm’s point of view (i.e. net of tax) this affects Average and Marginal Revenue, which now defined in net terms as: AR ) t 1 ( Q ) PQ )( t 1 ( ' AR ; MR ) t 1 ( Q )] PQ )( t 1 [( ' MR It is convenient to show this in a diagram with the price facing the consumer on the vertical axis. P P 2 P 1 P 2 (1-t) MC MR’ MR AR’ AR Q 2 Q 1 Q

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
The original profit maximising equilibrium is at P 1 and Q 1 . From the producer’ point of view the AR and MR shift down by the amount of the tax. The firm now sets MC = MR’.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 5

EC111Class6Answers - UNIVERSITY OF ESSEX DEPARTMENT OF...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online