Explain the concepts of consumers' surplus and producers' surplus. Why in a competitive market social welfare is the highest at the equilibrium? Use a diagram to illustrate your answer. (b) Explain the main effects of the introduction of a specific tax on the competitive market equilibrium. How these effects depend on the elasticity of demand and supply? Use a diagram to your answer. (c) Since specific taxes introduce a possible welfare loss in a free market, would you argue against the use of this government policy? Explain.

Explain the concepts of consumers' surplus and producers' surplus. Why in a competitive market social welfare is the highest at the equilibrium? Use a diagram to illustrate your answer. (b) Explain the main effects of the introduction of a specific tax on the competitive market equilibrium. How these effects depend on the elasticity of demand and supply? Use a diagram to your answer. (c) Since specific taxes introduce a possible welfare loss in a free market, would you argue against the use of this government policy? Explain.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter8: Application: The Cost Of Taxation

Section: Chapter Questions

Problem 1PA

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4. Suppose that the demand curve and supply functions are qp = 300–5p and qs = 100+20p, respectively. (a) On the same graph, draw the demand and supply curves with price on the vertical axis. (b) What is the quantity and price in the equilibrium? (c) Calculate consumer surplus and producer surplus. (d) Suppose the government implements a $5 dollar per unit sales tax. i. Calculate the new quantity and the price paid by the consumer. ii. Calculate the consumer surplus, producer surplus, tax revenue, and deadweight loss. iii. What share of the tax is passed on to the consumer and what share of the tax is passed on to the producer? iv. Graph the taxed equilibrium on a new graph. (e) Recalculate parts a through d but now suppose that quantity supplied is perfectly inelastic. Specifically, suppose that qs = 100. (f) Recalculate parts a through d but now suppose that quantity demanded is perfectly inelastic. Specifically, suppose that qp = 400
The market supply and demand for a product are shown in the diagram below. Now supose the government imposes a per-unit tax of $1 on producers. (i) What happens to total revenue received by producers after they pay the tax to the government? Explain. (ii) Will producer surplus increase, decrease, or stay the same? (iii) Will total surplus increase, decrease, or stay the same? Explain.
1. The demand curve for cab rides is p = 5 · y where y represents passenger miles. %3D 1,000' The supply curve is p = 2 for y< 2,500 and it becomes perfectly inelastic at y = 2,500. (i) Find the equilibrium price and quantity. (ii) Find the consumers' surplus and producers' surplus. (iii) Suppose that an excise tax of e = 0.50 per passenger mile is imposed on suppliers. Find the new equilibrium price and quantity. (iv) Finally, suppose that a sales tax of t= 0.50 is imposed on consumers. (The excise tax is still in place.) Find the new equilibrium price and quantity. (v) Explain briefly why the economic burden of the tax and the deadweight loss from imposing the tax are different for the excise tax and the sales tax.
Graph B.5. shows the economics offects of a per-unit tax Refer to Graph B 5. to answer (38 following questions Graph B.5 P S P₁ D₂ D₁ Q Q₁ Q₂ Qs (a) is the tax levied on buyers or on sellers? (b) What is the price buyers pay after the tax is imposed? (c) What is the price the sellers receive after the tax is imposed? (d) What area represents government tax revenue after the tax is imposed? Ps ܘ ܘ ܘ ܘ ܘ P₂ B C F 11 J К H L M
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