Reference no: EM138500
1. Suppose that the pretax price of cigarettes is $3.00/pack and the post tax price of cigarettes is $4.00/pack. The tax is $1.50/pack and is paid by the retailers of cigarettes to the government. Six hundred packs were sold prior to the tax increase and 500 packs were sold after the tax. What is the producer tax burden?
2. In the province of Alberta, the tax on hotel rooms is 5 percent. Supporters of this tax argue that the tax benefits the province because its victims are largely out-of-province tourists. Use the theory of tax incidence to analyze this claim diagrammatically.
3. Demonstrate using a consumer's diagram (budget constraints and indifference curves) that a tax on barley that leaves each consumer buying the same amount of barley as before can still create an excess burden.
4. For parts (a) - (c) below, assume the labour market in Canada is described by the equations following equations:
- Labour demand LD: 90-5w
- Labour supply LS: 5w
where w is the wage rate per hour of labour. For each part below, show a separate diagram.
a) What is the equilibrium wage and hours of labour in this labour market, assuming no government intervention in place? Show your answer in a well-labelled diagram.
b) Assume the government has put in place a tax, such that workers must submit $1 per hour worked to the government after receiving their pay cheque from employers. What is the incidence of this new tax and the effect on hours worked? Show your answer in a well-labelled diagram.
c) In 1975, the government had introduced the Anti-Inflation Act, preventing employers from providing large wage increases to their employees. Suppose this was structured so that employers could not pay more than $9.25 per hour to their employees. Now assume the government has put in place a tax as in part (b) and implement the Anti-Inflation Act. What is the incidence of the new tax and the effect on hours worked? Show your answer in a well-labelled diagram.
5. Annie is a vegan who eats lentils every day but sometimes she eats red lentils and sometimes she eats yellow lentils. Red lentils cost $1 per 100 grams and yellow lentils cost $2 per 100 grams. Annie's weekly budget for lentils is $72. Suppose the government decides to tax yellow lentils at a rate of 20 percent and to tax red lentils at a rate of 10 percent.
Use a consumer's diagram (i.e. budget constraints and indifference curves) to illustrate the total tax revenue paid by Annie and her excess burden arising from taxing lentils each week. Label the axes of your diagram and give the values of the slope and intercepts of the budget constraint, before- and after-tax.
6. Sam is a self-employed sandwich vendor near a Chicago hospital. He competes in the local market with several vendors who are just like him and he earns a profit of $30,000 per year. The customers are mainly doctors whose incomes put them in the top 1 percent of the income distribution. The market demand curve for sandwiches per year in the neighborhood of the hospital is QD = 84,000 - 2000P and the market supply curve is QS = 5000P.
As part of its policy of taxing "fast foods" the government places a levy on vendors equal to $1.40 per sandwich sold. Compute the resulting tax revenue and divide this amount into the incidence on consumers and the incidence on producers.
7. In an effort to reduce alcohol consumption, the government is considering a $1 tax on each gallon of liquor sold (the tax is levied on producers). Suppose that the supply curve for liquor is upward sloping and its equation is Q = 30,000P(where Q is the number of gallons of liquor and P is the price per gallon). The demand curve for liquor is. Q= 50,000 - 20,000P
a. Calculate the market price, the price paid by consumers, and the price received by sellers, before and after the tax is levied.
b. Calculate the elasticities of demand and supply at the pre-tax equilibrium price and quantity and relate these elasticity numbers (qualitatively) to your findings in part (a).
c. From part (a) (and the change in quantity) calculate the change in consumer surplus and the change in producer surplus resulting from the tax.
d. How much revenue does the tax raise? How might the researcher allocate these revenues when analyzing the incidence of the tax burden?
8. Suppose the government is considering the introduction of a 50% sales tax on xylophones. Assume that the producers of xylophones face constant marginal costs and before the introduction of a tax 200 units are sold in the market at $20 per unit. The demand curve is described by the equation QD =600-20P. What is the excess burden associated with introducing this tax?
9. Suppose the government is considering the introduction of a 50% sales tax on xylophones. Measure the loss in welfare associated with the introduction of this tax, using consumer choice theory. You should assume individual's utility is defined as U=X2Y2, the price of xylophones is $1 per xylophone, and alternatively people will buy yoyos at $1 each. Individuals have $900 per week to spend on these two goods.