Chapter 14, Problem 4DQ

To determine

The incentive effect of each of the hypothetical tax on the people’s behavior.

Introduction:

Law of demand: The law of demand states that the quantity of good that an individual buys, and its price is inversely related to each other. As the price of the good rises, the demand for that good falls.

Explanation:

A $1,000,000 per story tax on all office buildings more than two stories tall would have the following effects:

(a)

• The tax would cause the price of the building with more than two stories to increase. As the price increases, the demand for such building would decrease. On the other hand, the demand for building with two or less stories would increase.

• The change in the demand would make the construction of a two or less story building to increase and the construction of two or more story building to decrease.

• The commercial real estate companies have an incentive to build more office of two or less story building.

(b)

• Imposition of tax on red cars leads to an increase in the price of red cars. An increase in the price of red cars leads to a fall in the demand for red cars. People start look for substitute goods.

• As cars other than red colored cars is the perfect substitute, so, the demand for other colored car increases.

• Hence, the demand for red cars decreases. As a result, the supply of red cars also decreases. On the other hand, due to an increase in the demand for other color car, its production increases.

(c)

• Imposition of $100 on a new book leads to an increase in the price of the new book. An increase in the price will lead to a fall in the demand for the new book.

• Students would look for a substitute of the new book. Pirated books or old books would be perfect substitute goods. As a result, the demand for pirated and old books would increase.