ECONOMICS 0105
HOMEWORK #3

Table 1

TAX = \$3       SUB = \$3
P       Qd(SR)         Qd(LR)          Qs(0)         Qs(TAX)         Qs(SUB)

\$14        20                 *                  200

\$13        30                 *                  180

\$12        40                 0                  160

\$11        50               20                  140

\$10        60               40                  120

\$9        70               60                  100

\$8        80               80                    80

\$7        90             100                    60

\$6      100             120                    40

\$5      110             140                    20

\$4      120             160                      0

\$3      130             180                      *

1. Use the numbers in Table 1 to calculate the following:

a. Compute the Qs(TAX) when the initial tax burden of \$3 is assigned to the producer.

b. Compute the following:

(1) ED(SR) and ES(TAX) between \$11 and \$9.

(2) ED(LR) and ES(TAX) between \$10 and \$9.

2. Draw a graph of the SR demand curve and the two supply curves, being sure to label all relevant points with numbers (Note: You should not use every number in the table; instead you should label the numbers where the supply and demand curves touch the relevant axes, the equilibrium points, etc.).

3. Draw a graph of the LR demand curve and the two supply curves, being sure to label all relevant points with numbers.

4. Where is the unit elastic point on the SR and LR demand curves? Explain.

5. Use the numbers in Table 1 to do the following problems concerning the final burden of a tax.

a. Compute the final burden of the tax for producers and consumers for the SR demand curve and indicate these areas on a graph. Explain what you find and compare your results to the elasticity computations in 1.b.(1).

b. Compute the final burden of the tax for producers and consumers for the LR demand curve and indicate these areas on a graph. Explain what you find and compare your results to the ones you calculated for the SR demand curve and to the elasticity computations in 1.b.(2).

6. Using the numbers in Table 1, compute the Welfare Losses (WLs) for the SR demand curve and the LR demand curve and indicate these areas on the two graphs. Explain what you find.

7. Repeat the above exercises for the case of a specific subsidy to producers. (Note: This applies to 1.a., 2, 3, 5-omit the comparison to the elasticity calculation-and 6.) Instead of the final burden of the tax for consumers and producers substitute the final gains of the subsidy for consumers and producers.

8. Do the following problems using the concept of cross elasticity.

a. Graph and explain what happens in the legal and illegal markets for alcohol when the alcohol tax in the legal market is increased (assume the cross elasticity of demand is +5).

b. Graph and explain what happens in the automobile and gasoline markets when new regulations require the installation of air bags in all new cars (an increase in the cost of a new car). Explain what the cross elasticity of demand should be between these two markets.