Consider a market with aggregate demand given by 1000 - 100p. Suppose that there are 10 competitive firms, each with a cost function given by c(q) = q²/20. Suppose that the government introduces a percentage tax on profists of size s> 0 (i.e., firms have to pay s dollars for each dollar of profits). The revenue raised by the tax is given back to consumers using a lump-sum transfer. Suppose also that the firms are owned by a fraction f of the consumers in the market. Finally, let II denote the equilibrium per-firm profits prior to the intro- duction of the tax. QUESTION: What is the loss in well-being of firm owning consumers (as a group) generated by the introduction of the tax?

Consider a market with aggregate demand given by 1000 - 100p. Suppose that there are 10 competitive firms, each with a cost function given by c(q) = q²/20. Suppose that the government introduces a percentage tax on profists of size s> 0 (i.e., firms have to pay s dollars for each dollar of profits). The revenue raised by the tax is given back to consumers using a lump-sum transfer. Suppose also that the firms are owned by a fraction f of the consumers in the market. Finally, let II denote the equilibrium per-firm profits prior to the intro- duction of the tax. QUESTION: What is the loss in well-being of firm owning consumers (as a group) generated by the introduction of the tax?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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