Tuesday, December 7th, 2010

Answers to the Practice Problems from class:

1. a. There is no deadweight loss if no tax has been imposed.  Deadweight loss only occurs when the market is no longer in equilibrium.

1. b. Consumer surplus decreased.   Produced surplus decreased.  Tax revenue increased (from zero before the tax). Deadweight loss increased (from zero before the tax).

2. a. False; if a tax is imposed on sellers, and the supply curve is perfectly elastic, there will be no tax revenue, but there will be deadweight loss.  All sellers would leave the market due to the tax, thus leaving no revenue for the government to collect (can’t collect revenue if nothing is being sold).  Since all the sellers left the market, there can’t be any buyers either; thus, there is deadweight loss reflected in the loss of all of the participants in the market.

3. a. False; if a tax is imposed on sellers, and the demand curve is perfectly inelastic, there is no deadweight loss, but there is tax revenue.  If the tax shifts the supply curve to the left, because the demand is perfectly elastic, there is no loss in quantity bought/sold.  All of the tax burden is on the buyer.  There is tax revenue collected (Pb-P1)(Q), and there is no deadweight loss.

4. a. Most of the burden is on the demand because it is more inelastic.

4. b. Most of the burden is on the supply because it is more inelastic.

5. a. The deadweight loss would be greater in the 5th year because oil becomes more elastic over the long run.  Deadweight loss is greater the more elastic the market is.

5. b. The tax revenue would be greater in the 1st year because oil is inelastic in the short run (for both buyers and sellers).  Since people are still forced to buy the oil, you would not lose much quantity bought/sold, even with the increase in price to buyers. 

6. Taxing food is a good way to raise revenue because demand is very inelastic, so there would not be a lot of deadweight loss.  Some people would greatly oppose such a tax on food because they would say it is highly inequitable (disproportionately taxes the poor more than the rich).

7. a. Because of such a high tax rate, quantity would fall dramatically, and tax revenue would be very small (very elastic good).

7. b. Senator Moynahan probably wants to reduce/prevent the use of hollow-tipped bullets rather than make them illegal.

Answers to the study review guide:

1. a. Trip to Florida (luxury)

1. b. Next five years (time – long run)

1. c. Coca-Cola (definition of the market  – narrow)

1. d. aspirin (availability of close substitutes)

3. Same (each respond to the price change by reducing qd by 4 units).

4. Necessities – usually along the highway for motorists desperately in need of lodging.  (Hotels are more luxury lodging.)

5. a. Televisions (flexibility of sellers to increase production)

5. b. Next year (time – long run)

5. c. Print painting (flexibility of sellers to increase production)

6. Necessities vs. luxuries, availability of close substitutes, definition of the market, time.

7. Raise total revenue.  (Elasticity arrow matrix)

8. Zero (perfectly inelastic, no change in qd).

9. Indeterminate (perfectly elastic).

10. -0.5, inferior goods because negative IED.

11. Elastic because can increase production relatively easily.

12. Becomes more elastic (fish goes bad quickly, so people won’t want to buy it as much after time has passed).

13. False; elastic

14. True

15. False; more elastic this year

16. False: % change in qd/ % change in price

17. True

18. False; inelastic

19. True

20. True

21. True

22. True

23. False

24. True

25. False; inferior

26. True

27. True

28. D

29. C

30. B

31. B

32. A

33. D

34. E

35. C

36. B

37. A

38. D

39. B

40. Mistake, answer is E. E + F

41. D

42. C (most elastic)

43. A

44. D

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