Chapter 8

8. Using the graph shown for cases of Coke, calculate each of the following. Make sure you show the calculations.

a. equilibrium price

b. equilibrium quantity

c. consumer surplus

d. producer surplus

Now suppose that the government imposes a $2.00 tax per case on the sellers of Coke. Show this on the graph and calculate each of the following after the tax is imposed. (let’s assume that tax shared equally)

e. price paid by buyers

f. price received by sellers

g. consumer surplus

h. producer surplus

i. government revenue

j. deadweight loss

9. Samat has been in the habit of mowing Kairat’s lawn each week for $20. Samat’s opportunity cost is $15, and Kairat would be willing to pay $25 to have her lawn mowed.

What is the maximum tax the government can impose on lawn mowing without discouraging Samat and Kairat from continuing their mutually beneficial arrangement? Hint: find amounts of Tax which would make parties better off and/or worse off or one of them better off the other worse off. Explain how so and why?

10. Using demand and supply diagrams, show the difference in deadweight loss between a market with inelastic demand and supply curves and a market with elastic demand and supply curves. Graphes are needed to demonstrate your answer and try to explain the reasons why they are so.

11. Write shortly the story of Henry George about the Land Tax (both being equitable and efficiency). Under what conditions would a tax on land be efficient, i.e., create no deadweight loss for society? (Case study)

12. Illustrate on three demand and supply graphs how the size of a tax (small, medium and large) can alter total revenue and deadweight loss.

13. Draw a Laffer curve and explain the story of supply-side economics. On which part of the Laffer curve does the U.S. economy operate? Are there individuals in the U.S. operating on the other side of the curve? What evidence can you cite to justify your answers?

14. Suppose that a tax is imposed on the coal market, and is left in place for several years. What would you predict about (a) the size of the deadweight loss of the tax in the short run relative to the long run, and (b) the amount of revenue collected from the tax in the short run relative to the long run? Assume that the economy doesn’t grow during the period in question.

15. Analize the Case study about the Deadweight loss of Tax on labor. There are some examples of workers who may respond more to incentives: Workers who can adjust the number of hours they work, Families with second earners, Elderly who can choose when to retire, Workers in the underground economy. Explain each shortly, please, how come they do so.

16. Be ready to explain all Key Concepts on the last page of the chapter.

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