ECON 101 2Midtermreview

The firms goal a firms goal is to maximize profit if

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Unformatted text preview: gasoline have inelastic demand, so the buyers of these items pay most the tax on them. Ø། Labour has a low elasticity of supply, so the seller—the worker—pays most of the income tax and most of the Social Security tax. Taxes and Efficiency Except in the extreme cases of perfectly inelastic demand or perfectly inelastic supply when the quantity remains the same, imposing a tax creates inefficiency. Figure 6.10 shows the inefficiency created by a $20 tax on MP3 players. Ø། With no tax, marginal social benefit equals marginal social cost and the market is efficient. Ø། Total surplus (the sum of consumer surplus and producer surplus) is maximized. Ø། The tax decreases the quantity, raises the buyers’ price, and lowers the sellers’ price. Ø། Marginal social...
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This note was uploaded on 03/29/2014 for the course ECON 101 taught by Professor Vanderwaal during the Spring '08 term at Waterloo.

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