Consider the economy of Pomistan, where citizens consume only apples. Assume that apples cost $1 each, and each person can buy at most 5,000apples. The government has devised the following tax plans:Plan AConsumption up to 1,000 apples is taxed at 20%.Consumption higher than 1,000 apples is taxed at 80%.Plan BConsumption up to 2,000 apples is taxed at 30%.Consumption higher than 2,000 apples is taxed at 10%.Derive the marginal and average tax rates under each tax plan at the consumption levels of 500 apples, 1,500 apples, and 2,500 apples, respectively.Fill in the following table with your results.Consumption Level500 apples1,500 apples2,500 applesPlan AMarginal Tax Rate20%, 40%,80%,56%20%,40%,80%,56%20%, 40%, 80%,56%Plan BMarginal Tax RateAverage Tax Rate20%,40%,80%,56%20%, 40%,80%,56%20% 40%, 80%,56%Average Tax Rate26%, 22%, 10%, 30%26%, 22%, 10%, 30%26%, 22%, 10%, 30%26%, 22%, 10%, 30%26%, 22%, 10%, 30%26%, 22%, 10%, 30%

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Answered: Consider the economy of Pomistan, where…

Microeconomics: Principles & Policy

14th Edition

ISBN:9781337794992

Author:William J. Baumol, Alan S. Blinder, John L. Solow

Publisher:William J. Baumol, Alan S. Blinder, John L. Solow

Chapter6: Demand And Elasticity

Section: Chapter Questions

Problem 3TY

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Consider the economy of Cocoland, where citizens consume only coconuts. Assume that coconuts are priced at $1 each. The government has devised the following tax plans:
The government increases the tax on cigarettes by £1 per pack. Before the increase, the tax rate on cigarettes was £4 per pack, and 2.5 billion packs of cigarettes were being consumed at a retail price of £5. Suppose that the price elasticity of demand for cigarettes is -0.25 and that consumers bear the full burden of the tax increase. How many packs of cigarettes will be consumed after the tax increase? a) 2.25 billion b) 2.375 billion c) 2.5 billion d) 3.125 billion
P2 D2 D1 Consider the effect of the anti-smoking campaign to be funded by proceeds of the cigarette tax. If the tax raises the price from P1 to P2 and the anti-smoking campaign is successful,
The government places a tax on the purchase of socks. The following graph shows the market for socks before the tax. Assume that neither the demand curve nor the supply curve is perfectly elastic or perfectly inelastic. Use the green polygon (triangle symbol) to indicate the area that represents total spending by consumers before the government implements the tax. Then use the purple polygon (diamond symbol) to shade the area representing total revenue for producers in this case. (?) Price of Socks Demand Before Tax Quantity of Socks Supply Total Spending by Consumers Total Revenue for Producers image 1 The following graph shows the same market for socks, and the corresponding tax wedge.
Assume the government taxes packs of cigarettes both to discourage cigarette smoking and to raise tax revenue. The average excise tax on a pack of cigarettes is $2.50 per pack. The table below presents the annual demand and supply schedules, In billions of packs. both before and after the tax on packs of cigarettes. Market for Cigarettes Price (dollars par pack) $10.00 9.75 9.50 9.29 8.75 8.58 8.25 3.08 7.75 7.58 7.25 7.08 6.75 6.58 4.25 6.00 5.75 5.58 9.25 5.00 4.75 4.50 Quantity of Cigarettes Demanded (Dillions of packa) 5.0 7.5 10:0 12.5 15.0 17.5 28.0 22.5 25.0 27.5 32.5 39.0 37.5 42.5 45.8 47.5 50.0 52.5 55.0 57.5 60.0 Quantity of cigarettes supplied (billions of packs) 65.0 62.5 60.0 57.5 52.9 50.0 47.5 45.0 42.5 37.5 35.0 32.5 30.0 27.5 25.0 22.5 28.0 $2.50 per pack $0.50 per pack $1.75 per pack $700 Ft paci 17.5 15.0 12.5 18.0 Quantity of Cigarettes Supplied with Tax (billiona of packs) 49.0 37.5 35.0 32.5 30.0 27.5 25.8 22.5 28.8 17.5 15.8 12,5 18.0 a. What are the equilibrium…
You have been asked to explain to Magdalena Andersson and Per Bolund what the effects will be of raising the tax on petrol by SEK 2 per liter (the tax is paid by the sellers). Magdalena Andersson (Minister of Finance) would very much like to know how much the tax revenue is affected and Per Bolund (Minister of the Environment) would like to know how the consumption of petrol (and thereby the environment) is affected. Explain to them under what circumstances consumption decreases much and little, and under what circumstances the tax increases much and little. Keep in mind that Per Bolund has not studied economics, so you should explain the terms you use if there is a risk of misunderstanding.
Due to good weather, there is an increase in the demand for the good. The new demand equation is Qd = 190 – 2P. The government is trying to decide between two options: Maintain the number of quotas and let the market adjust, orMaintain the price support and increase the number of quotas. Suppose now that the government decides to increase the number of quotas available to 72 units, but it keeps the price support at the current level of $72. Calculate: i) the consumer Surplusii) the producer surplusiii) deadweight loss HINT: Sketch the supply and demand equations. Which of the two options would be preferred by the producers? Which of the two options would be preferred by society as a whole?
Consider the economy of Cocoland, where citizens consume only coconuts. Assume that coconuts are priced at $1 each. The government has devised the following tax plans: Plan A • Consumption up to 1,000 coconuts is taxed at 35%. • Consumption higher than 1,000 coconuts is taxed at 20%. Plan B • Consumption up to 2,000 coconuts is taxed at 10%. • Consumption higher than 2,000 coconuts is taxed at 25%. Use the Plan A and Plan B tax schemes to complete the following table by deriving the marginal and average tax rates under each tax plan at the consumption level of 700 coconuts, 1,500 coconuts, and 2,500 coconuts, respectively. Consumption Level Plan A Plan B (Quantity of coconuts) Marginal Tax Rate Average Tax Rate
Consider the economy of Cocoland, where citizens consume only coconuts. Assume that coconuts are priced at $1 each. The government has devised the following tax plans: Plan A • Consumption up to 1,000 coconuts is taxed at 50%. • Consumption higher than 1,000 coconuts is taxed at 20%. Plan B • Consumption up to 2,000 coconuts is taxed at 10%. • Consumption higher than 2,000 coconuts is taxed at 25%. Use the Plan A and Plan B tax schemes to complete the following table by deriving the marginal and average tax rates under each tax plan at the consumption levels of 600 coconuts, 1,200 coconuts, and 2,500 coconuts, respectively. Consumption Level Plan A Plan B (Quantity of coconuts) Marginal Tax Rate Average Tax Rate Marginal Tax Rate Average Tax Rate (Percent) (Percent) (Percent) (Percent) 600 1,200 2,500 Complete the following table by indicating whether each…
Consider a country which taxes two goods, diamonds and bread. Each good has a supply elasticity of 1. The demand elasticity for diamonds is ηdd = −4; the demand elasticity for bread is ηbd = −0.25. In the market equilibrium, bread costs pb = $1 and a quantity of 100 is sold; diamonds cost $1000 and 10 are sold. Suppose a tax of τb = $0.50 is imposed on bread, and a tax of τd = $200 is imposed on diamonds. (a) What portion of the tax on bread is borne by consumers? What portion of the tax on diamonds is borne by consumers? (b) What is the deadweight loss from the tax on bread? What is the deadweight loss from the tax on diamonds? (c) Are these taxes optimal according to the Ramsey rule? If not, which tax should be increased and which should be decreased? (d) Are there any equity considerations which would argue against your answer for part (c)
Suppose that the equilibrium quantity in the market for gadgets has been 85,000 per month. Then a tax of $6 per gadget is imposed on gadgets. As a result, the price paid by buyers increases by $4 and the after-tax price received (and kept) by sellers falls by $2. Given this tax imposition, the government is able to raise $481,740 per month in tax revenue. We can conclude that the imposition of the tax (x) has caused a deadweight loss by an amount more than $13,750 but less than $14,500 per month. (y) has reduced the equilibrium quantity of gadgets by more than 4,450 but less than 4,675 gadgets per month. (z) has reduced consumer surplus by more than $328,750 per month and has reduced producer surplus by more than $164,775 per month.
For Questions 45-47 Suppose the current equilibrium price of a gadget is $4 and the equilibrium quantity is 100. Then the government imposes an excise tax of $2 per unit on the production of gadgets. Subsequent to the tax and the resulting supply shift, the equilibrium quantity falls to 90. The elasticity of demand coefficient associated with the movement between the two equilibrium points is .5. dollars. 45. The post- tax price is equal to 46. The Incidence Ratio is equal to 47. Who bears the greater economic burden of the tax?

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