ECO100Y1 Lecture Notes - Lecture 21: Average Cost, Marginal Cost, Average Variable Cost

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bluegrasshopper710

18 Jan 2018

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A tax has been levied on a product. Incidence of a sales tax (who ultimately pays tax, the buyer or the seller?) Assume tax to be paid by seller (remember: incidence does not depend on whether paid by seller or by buyer) Insight: use perfectly inelastic and perfectly elastic demand curves to analyze problem. Answer is d: the lower is the revenue that is raised by the tax. Perfectly inelastic dd: market price increases by amount of tax full incidence falls on buyer. Perfectly elastic dd: market price does not increase full incidence falls on seller: a fir(cid:373)"s (cid:373)argi(cid:374)al cost is , its average total cost is , a(cid:374)d its output is 800 units. Its total cost of producing 801 units is probably: less than ,000, between ,000 and ,050, less than ,000, between ,000 and ,050, greater than ,080.

Related Questions

14. The proportion of a sales tax paid by consumers will be greater the more elastic is demand. 2 inelastic is demand. 3 elastic is supply inelastic is supply 4 A) B) C) D) E) 2 only 1 and 3 1 and 4 2 and 3 2 and 4

Excise Taxes and Tax Revenue: The government pays attention to elasticity of demand when it selects goods and services on which to levy excise taxes (taxes levied on the production of a product or on the quantity fo the produc purchased). If a $1 tax is levied n a product and 10,000 units are sold, tax revenue will be $10,000 $1 X 10,000 units sold). If the government raises the tax to $1.50, but the higher prices that results reduces sales (quantity demanded) to 4000 because demand is elastic, tax revenue will decline to $6000 $1.50 X 4000 units sold). So a higher tax on a product that has an elastic demand will b ring in less tax revenue. In contrast, if demand is inelastic, the tax increase from $1 to $1.50 will boost tax revenue. For example, if sales fall from 10,000 to 9000, tax revenue will rise from $10,000 to $13,500 $1.50 X 9000 units). Little wonder that legislatures tend to seek out products such as liquor, gasoline, cigarettes, and phone services when levyingand raising taxes. Those taxes yield high tax revenues.

Question: Under what circumstance might a reduction of an excise tax actually produce more tax revenue?

jadesardine228

1. Explain briefly why generally government shouldn't place taxes in markets that have pre-existing distortions. Be specific. Give an example where taxes can improve the distortion

2. Suppose the demand for apples is perfectly elastic and the government levies a tax t on the producers of apples. Assume that the supply of apples is neither perfectly elastic nor perfectly inelastic (upward sloping)

a. Explain using a graph how the price paid by consumers will change.

b. What is the statutory burden of the tax ? Which party bears the largest economic burden?

c. Is this change larger or smaller than the price change that would result if demand for apples were not perfectly elastic?

d. How would the quantities of apples consumed change because of the tax? Is this change in quantity larger or smaller than the change that would result if the demand for apples were not perfectly elastic?

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ECO100Y1 Lecture Notes - Lecture 21: Average Cost, Marginal Cost, Average Variable Cost

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