Download Practice Free Response Solved

Practice Free Response Solved
1) Ed = 8.3 (using mid-point method)
%∆ Qty D / % ∆ Price
$25
Qty D = (40 - 0)/20 = 2.0
Price = [($28- 22)/$25] = .24
2/.24= 8.3
2) Less Elastic, as you move
20
downward along Demand curve (towards xaxis) demand becomes less elastic. That
is Ed becomes a smaller number
Know this:
- Mid-point of all linear demand
curves is UNIT ELASTIC.
- Bottom part is inelastic range
- Top part is elastic range
Practice Free Response Handout Solved
$14 Tax on sellers
3) Calculate Original:
S2
a)
b)
c)
d)
CS
480 consumer surplus
640 producer surplus
1120 total welfare
Zero loss of welfare
4) Tax of $14 on sellers
TAX
Deadweight
loss
REVENUE
PS
a)
b)
c)
d)
e)
f)
g)
h)
Modify….
22 buyers pay
8 seller receive
560 tax revenue
120 new c.s.
160 new p.s.
280 deadweight loss
840 total surplus
5) Sellers--more inelastic curve
You shift the supply curve
because the tax was on sellersbut draw the wedge first!
has Higher tax incidence
Buyers pay $6 of tax
Sellers pay $8 of tax
6) Ed < 1 (inelastic)
Cigarettes
No good subs, necessity
Tax Revenue
CS
7) See graph
i) buyer pays more
Sellers receive less
Qty sold falls
ii) – iv) labeled on graph
v) CS + PS + Tax Revenue
PB
TAX
P1
PS
E1
-----------------
PS
REVENUE
Deadweight
Loss
Q2 Q1
Notice buyers pay most of tax & DWL is
small because of inelastic demand!
4)
8) See below:
i) Qty falls more, Sellers
pay more, buyers pay
less
ii) Less Gov’t revenue
iii) Shared more equally
(buyer paid most of tax before)
iv) Bigger DWL
(quantity shrinks more)
9) Spillover Costs of Smoking
Tax suppliers the exact size of the spillover cost (external cost)
Total Welfare would rise even though the market Shrinks
Both external &
internal costs!
MSC
Price
MC
)
Spillover
Cost
Optimum
P1
Equilibrium MC = MB
MB
0
QOPTIMUM QMARKET
Quantity
Basic Tax Example & DWL
Price Ceiling & DWL
Subsidy & DWL
(
Subsidy & DWL
.
.
(