EC111Class6Answers

EC111Class6Answers - UNIVERSITY OF ESSEX DEPARTMENT OF...

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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
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The original profit maximising equilibrium is at P 1 and Q 1 . From the producer’ point of
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This note was uploaded on 03/15/2012 for the course EC 111 taught by Professor Timhatton during the Spring '12 term at Uni. Essex.

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EC111Class6Answers - UNIVERSITY OF ESSEX DEPARTMENT OF...

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