Burden on tax And Consumer theory question Answer.doc

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Thompson Rivers University
ECON 1900
Nancy Carson

Answers to ECON 190 Exercise 7 1. The market for Widgets is illustrated in the diagram below. a) Label the equilibrium quantit0 an0 price (Q and P ) on the diagram. b) Calculate the price 1elasticity of demand and the price elasticity of supply over the price range $50 to $30 (Using original demand and supply curves) ΔQ 40 %ΔQ avgQ 60 40 40 4 E d = 20 60 =20 1.3 = × = %ΔP ΔPavgP 40 3 ΔQ 20 %ΔQ avgQ 60 20 40 2 E s = 60 =20 0.67 = × = %ΔP ΔPavgP 240 3 c) The solutions from part i) allow you to compare the elasticity of demand to the elasticity of supply at the original equilibrium. As a result we can say that demand is relatively more _____elastic____________(elastic or inelastic) than supply. Price ($/unit) 90 80 S plus tax S 60 Pc P040 P D p20 0 20 Q0 Q0 8090 1 0 Widgets (units) d) 1Now a sales tax of $30 per unit sold is imposed on the production of widgets. Illustrate the effect of the tax on the diagram above. e) What is the price consumers pay once the tax is introduced? ________$50______________ f) What is the price producers receive after paying the tax? _________$20_____________ g) What is the equilibrium quant_________40_________________ 1 h) How much tax revenue does the government collect? $30(40) = $1200 _____ i) What will be the consumers’ share of the tax burden?$50-$40 = $10 j) What is the producers’ share of the tax burden? $40-$20 = $20__________ k) Calculate the price 1elasticity of sup
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