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.

Question

Want to see the full answer?

Answer 1

Question

Chapter 15, 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.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Using data from 1988 for houses sold in Andover, Massachusetts, from Kiel and McClain (1995), the following equation relates housing price (price) to the distance from a recently built garbage incinerator (dist): = log(price) 9.40 + 0.312 log(dist) n = 135, R2 = 0.162. Interpretation of the slope coefficient? ► How would our interpretation of the slope coefficient change if distance were measured in metres instead of kilometres?

If GDP goes up by 1% and the investment component of GDPgoes up by more than 1%, how is the investment share ofGDP changing in absolute terms?▶ In economics, what else is expressed as relative percentagechanges?

CEO Salary and Firm SalesWe can estimate a constant elasticity model relating CEO salary to firm sales. The data set is the same one used in Example 2.3, except we now relate salary to sales. Let sales be annual firm sales, measured in millions of dollars. A constant elasticity model is[2.45]ßßlog (salary) = ß0 + ß0log (sales) + u,where ß1 is the elasticity of salary with respect to sales. This model falls under the simple regression model by defining the dependent variable to be y = log(salary) and the independent variable to be x = log1sales2. Estimating this equation by OLS gives[2.46]log (salary)^=4.822 + 0.257 (sales) n = 209, R2 = 0.211.The coefficient of log(sales) is the estimated elasticity of salary with respect to sales. It implies that a 1% increase in firm sales increases CEO salary by about 0.257%—the usual interpretation of an elasticity.