ECO206Y1 Lecture Notes - Remittance, Economic Equilibrium

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19 Oct 2012
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Our understanding of elasticity will help us analyze the impact of sales taxes or subsidies on equilibrium price and quantity. The simplest sales tax is a fixed tax per unit sold, regardless of the price or quantity of the units sold. Since the sellers impose the tax on each unit sold, the sellers add the amount of the tax to the price of each unit sold. This means that the supply function shifts up by the amount of the tax. Initial equilibrium => 84 0. 03q = 26 + 0. 02q. => qo = 1160 and po = . 20. => supply: p = 12 + 26 + 0. 02q. After tax equilibrium => 84 0. 03q = 38 + 0. 02q. => q1 = 920 and p1 = . 40. Total tax revenue = tax/unit * q1 = * 1100 = . Note: the equilibrium price after the tax increased by . 20 (. 40 - . 20) not .

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