8/3/2019 Micro Ch06-08 ICA Taxes

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  Name_________________________________________________ Economic

Taxes

1. In 1990 Congress adopted a new luxury tax on items such as yachts, private jets, furs, jewelry, andexpensive cars. The goal of the tax was to raise revenue from those who were wealthy and could easilyafford to pay.

a. Consider the market for yachts. Demand for yachts is quite elastic (luxury goods have a large price

elasticity of demand). The supply of yachts, happens to be quite inelastic (take a while to build, capacityconstraints). Using this information graph the supply and demand for yachts.

 b. Suppose the government levies a large tax on yachts. Who will end up with the larger portion(buyers or sellers) of the tax burden? How do you know?

c. Now illustrate the tax on yachts graphically on your original graph above. Be sure to fully label:- price and quantity after the tax- price consumers pay, price producers pay- government revenue, including portion paid by consumers and portion paid by producers- deadweight loss

Use your graph to confirm that your answer to part ³b´ is correct.

d. Does the luxury tax end up raising revenue from wealthy consumers? Explain.

(FYI-Congress ended up repealing the luxury tax in 1993)

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2. Consider the market for scotch. Demand and supply are given byP = 100 ± (3/4)QP = 20 + (1/4)Q

a. Solve for equilibrium price and quantity. 

 b. Suppose that the government wishes to discourage people from drinking scotch and so it levies a taxof $5 per bottle. Write the resulting new supply equation.

c. Solve for the after-tax equilibrium price and quantity. 

d. How much do consumers pay for scotch? How much of that price do sellers of scotch get to keep?How much revenue does the government collect? 

e. How much of the tax do consumers pay? Producers? Which curve (supply or demand) must be moreelastic? 

f. Illustrate the market for scotch before and after the tax.