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$7.00 Supply and Demand as a Function of TaxesThis question's due date has already passed. You may post a solution, but there's no guarantee that the original asker will buy the solution. But other people might!
| Question Details |
Bounty: $7.00 Negotiable
Due Date: May-12-2008
Posted On: May-11-2008, 11:22:32AM
Categories: Economics: Public Finance
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| Question |
A) The supply of newspapers is perfectly elastic at a price of $0.75. Sketch the supply and demand graph below and calculate the equilibrium number of newspapers demanded by consumers in this market assuming the quantity demanded is given by the function:
QD = 864,000 – 512,000P
Suppose that a 20 percent tax is imposed on sellers of newspapers, causing the after-tax price to increase to $0.9.
a) Show the effect of this tax in your graph (label the new supply line S’) and calculate the excess burden resulting from the tax graphically (i.e. using the values/areas on the graph).
b) Calculate the price elasticity of demand at the initial equilibrium point using the formula = |(P)(P/QD)| where is the price elasticity of demand, P is the initial price and QD is the initial quantity demanded of newspapers.
c) Use the value of you calculated above to verify that the excess burden (EB) can also be calculated using the formula EB = ½(PQ)t2, where t is the % tax rate, Q is the initial price and Q is the initial (equilibrium) quantity.
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