ONLINECO 

Chapter 8. Solution Exercises 1-7. Principle of economics.

 

1. The market for pizza is characterized by a downward sloping demand curve and an upward-sloping supply curve. a. Draw the competitive market equilibrium. Label the price, quantity, consumer surplus, and produce surplus. Is there any deadweight loss? Explain b. Suppose that the government forces each pizzeria to pay a $1 tax on each pizza sold. Illustrate the effect of this tax on the pizza market, being sure to label the consumer surplus, producer surplus, government revenue, and the deadweight loss. How does each area compare the pre-tax case? c. If the tax were removed, pizza enters and sellers would be better off, but the government would lose tax revenue. Suppose that consumers and producers voluntarily transferred some of their gains to the government. Could all parties (including the government) be better off than they were with a tax? Explain using the labeled areas in your graph.

 

2. Evaluate the following two statements. Do you agree? Why or why not? a. “If the government taxes land, wealthy land owners will pass the tax on their poorer renters”. b. “If the government taxes apartment buildings, wealthy landlords will pass the tax on to their poorer renters”.

 

3. Evaluate the following two statements. Do you agree? Why or why not? a. “A tax has no deadweight loss cannot raise any revenue for the government”.

 

4. Consider the market for rubber bands a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use the tools of consumers surplus and producer surplus in your answer. b. If this market has very inelastic supply and very elastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Contrast your answer with your answer to part (a)

 

5. Suppose that the government imposes a tax on heating oil. a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? B. Would the revenue collected from this tax likely be grater in the first year after it is imposed or in the fifth year?

 

6. After economics class one day, your friend suggests that taking food would be a good way to raise revenue because the demand for food is quite inelastic. In what sense is taxing food a “good” way to raise revenue? In what sense is it not a “good” way to raise revenue?

 

7. Senator Daniel Patrick Moynihan once introduced a bill that would levy a 10,000 percent tax on certain hollow-tipped bullets. a. Do you expect that this tax would raise much revenue? Why or why not? b. Even if the tax would raise no revenue, what might be Senator Moynihan’s reason for proposing it?