Dr. Shishkin
ECON 2106
Assignment #12
ANSWERS
Incidence, inefficiency, and the elasticity of demand and supply.
Income tax: average and marginal tax rates.
1. Explain under what two conditions a sales tax on a specific good would be paid
entirely by buyers.
Answer: Buyers pay all of a tax when the demand for the product is perfectly inelastic or
when the supply is perfectly elastic.
2. Consider the market for dining at Mexican restaurants. Suppose the price elasticity of
demand for Mexican food is 1.23 and the price elasticity of supply is 0.47. If the
government imposes a tax on Mexican food, do consumers or producers pay most of the
tax? Why?
Tax burden falls mostly on producers because supply is less elastic than demand.
3. Which would be a better source of tax revenue for the government, a good with elastic
or a good with an inelastic demand? Explain your reasoning.
Answer: Inelastic goods are better sources of tax revenue because, as price rises, the
equilibrium quantity does not decrease by as much as that of a good with elastic demand.
The government’s tax revenue, which depends on the equilibrium quantity of the good,
is larger when a good with an inelastic demand is taxed.
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Dr. Shishkin
ECON 2106
The figure above shows the market for tickets to the Super Bowl the day of the game.
Suppose the government imposes an entertainment tax of $100 per ticket charged from
the buyers.
4.
What is the price paid by buyers after the tax?
Pb=$200
5.
What is the price received by sellers after the tax?
Ps=$100
6.
What is the tax burden of the tax on buyers?
Tax burden on buyers is zero because they pay the same price.
7.
What is the tax burden of the tax on sellers?
Tax burden on sellers = P*- Ps = $200-$100 = $100
8.
What is the deadweight loss from this tax?
There is no deadweight loss from this tax because supply is perfectly inelastic.
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Dr. Shishkin
ECON 2106
Tax
Income
The diagram above shows the relationship between someone’s income and his or her
income tax in a particular country. (Show your work).
9. What is the marginal tax rate faced by someone making between $60,000 and $80,000
a year in this country?
MTR = (4500-1000)/(80,000-60,000) = 3,500/20,000 = 0.175 = 17.5%
10. What is the average tax rate faced by someone making $80,000 a year in this country?
ATR = 4,500/80,000 = 0.056 = 5.6%
Email me at [email protected], and text at (678) 524-5535 if I don’t respond
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