Chapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position
|
|
- Megan Flowers
- 7 years ago
- Views:
Transcription
1 Chapter 27: Taxation 27.1: Introduction We consider the effect of taxation on some good on the market for that good. We ask the questions: who pays the tax? what effect does it have on the equilibrium price and on the equilibrium quantity? what effect does it have on the surpluses? We shall see that taxation reduces the total surplus generated by the market this loss caused by the tax is called the deadweight loss of the tax. It reduces the efficiency of the market it reduces the surplus generated by the market and for that reason might be considered a bad thing. Though it is important to remember that there are obvious offsetting advantages the government can use the tax generated elsewhere in the economy. This good thing might well be worth the bad thing caused by the reduction of the total surplus generated by the market in which the tax is collected. In practice there are different kinds of taxes. The two most common are flat rate taxes and proportional taxes. The first of these are fixed taxes taxes independent of the price of the good. The second are taxes such as value added tax which are levied at a rate proportional to the price of the good. The most common form of a tax is the proportional form in many countries governments levy a value added tax. In the UK at present this is equal to 17.5% of the (pre-tax) price of the good. However, there also flat rate taxes such as was the case until recently with the vehicle registration licence. An even more famous example is the Poll Tax that Mrs Thatcher introduced on property ownership in the UK the owner of any house, however big or small, had to pay the same amount of Poll Tax to the government. We shall examine both of these taxes in this chapter. However our methods can be applied to any kind of tax. 27.2: The Two Prices with a Tax Whatever kind of tax we are examining, the crucial point is that with a tax there are two prices in the market: the price that buyers pay; and the price that sellers receive. The difference between these two prices is the tax which the government takes. Only when there is no tax are these prices equal. Accordingly when we use the price as one of the variables in our analysis we must specify which price is it that we mean. As we will see, we can do our analysis with either price we just have to be careful about which price it is. 27.2: The Pre-Tax Position Let us start with a situation in which there is no tax. We are going to work with a specific example initially and later we will generalise. In this specific example we take simple linear demand and supply schedules so we can see exactly what is going on. This initial position is pictured in figure 27.1.
2 The demand curve is given by q d = 100 p b (27.1) and the supply curve is given by q s = p s 10 (27.2) In these equations, q d indicates the quantity demanded and q s the quantity supplied. The price p b is the price paid by the buyers and p s the price received by the sellers. Here these two prices are the same as there is no tax, but when there is a tax they will be different. We note that the original equilibrium price is 55 and the original equilibrium quantity is : A Flat Rate Tax Let us now suppose that the government imposes a flat rate tax on the good. Let us suppose that this is at the rate 10 on every unit bought and sold. For every unit exchanged the government takes 10. What effect does this have? We look at the effect on the demand and supply schedules and hence on the equilibrium. Let us first do the analysis with the price paid by the buyers on the vertical axis. Since this is the relevant variable in the demand curve, the demand curve does not change. It is pictured in figure What about the supply curve? Well, we cannot use equation (27.2) directly as the variable there is the price received by the sellers - which is not the price variable that we are using in this analysis. Let us work out the new supply curve - first using a bit of algebra and then using some numbers. Algebraically it is simple. Since the price paid by buyers differs from the price received by the sellers by the tax we have that p b = p s +10 (27.3) If we use this in (27.2) to find the relationship between the quantity supplied and the price paid by the buyers we start with the supply curve: and then insert into it equation (27.3) to get q s = p s 10
3 q s = (p b 10) 10 hence getting the supply curve expressed as a relationship between the quantity supplied and the price paid by buyers: q s = p b 20 If we plot this in figure 27.2 we get the new supply curve pictured there. In this figure the downward sloping line is the (new and old) demand curve; the thick upward sloping curve is the new supply curve and the thin upward sloping line is the old supply curve. So the supply curve shifts upwards by the amount of the tax. Notice that the vertical distance between the two supply curves is equal to 10 the amount of the tax everywhere. An alternative way of seeing this is by working out some numbers. Consider the table below. Price received by the sellers Supply Price paid by the buyers The supply curve is illustrated in the first two columns which show the relationship between the price received by the sellers and the quantity supplied. Recall it is this relationship that defines the supply curve. We now derive the final column from the first taking into the account that the tax is 10 which makes the price paid by the buyers always 10 more than the price received by the sellers. Now in figure 27.2 we graph the relationship between the second and the third columns because 1 Always 10 more than the price received by the sellers.
4 the second column is the variable on the horizontal axis and the third column (not the first column) is the variable on the vertical axis. This is the thick upward sloping line in the figure. The effect of the tax on the equilibrium can now be seen it is at the intersection of the demand curve and the new supply curve. It is indicated in the figure. The new equilibrium quantity is 40 and the new equilibrium price is 60. But let us be precise the new equilibrium price paid by the buyers is 60. It follows that the new equilibrium price received by the sellers is 50. So before the tax, 45 units are exchanged, with the buyers paying 55 for each unit and the sellers receiving 55 for each unit. With the tax, only 40 units are exchanged, with the buyers paying 60 for each unit, the sellers receiving 50 for each unit and the government taking 10 in tax on each unit. Let us now repeat the analysis with the other price variable the price received by the sellers. If this is the variable on the vertical axis then the supply curve is the same as it was originally, as the price received by sellers is the variable which determines the supply. This is shown in figure What about the demand curve? Well, we cannot use equation (27.1) directly as the variable there is the price paid by the buyers - which is not the price variable that we are using in this analysis. Let us work out the new demand curve - first using a bit of algebra and then using some numbers. Algebraically it is simple. Since the price paid by buyers differs from the price received by the sellers by the tax we have equation (27.3) as before. If we use this in (27.1) to find the relationship between the quantity demanded and the price received by the sellers we get that q d = 90 - p s If we plot this in figure 27.3 we get the new demand curve pictured there. In this figure the upward sloping line is the (new and old) supply curve; the thick downward sloping curve is the new demand curve and the thin downward sloping line is the old demand curve. So the demand curve shifts downwards by the amount of the tax. Notice that the vertical distance between the two demand curves is equal to 10 the amount of the tax everywhere. An alternative way of seeing this is by working out some numbers. Consider the table below.
5 Price paid by the buyers Demand Price received by the sellers The demand curve is illustrated in the first two columns which show the relationship between the price paid by the buyers and the quantity demanded. Recall it is this relationship that defines the demand curve. We now derive the final column from the first taking into the account that the tax is 10 which makes the price paid by the buyers always 10 more than the price received by the sellers. Now in figure 27.3 we graph the relationship between the second and the third columns because the second column is the variable on the horizontal axis and the third column (not the first column) is the variable on the vertical axis. This is the thick downward sloping line in the figure. The effect of the tax on the equilibrium can now be seen it is at the intersection of the new demand curve and the supply curve. It is indicated in the figure. The new equilibrium quantity is 40 and the new equilibrium price is 50. But let us be precise the new equilibrium price received by the sellers is 50. It follows that the new equilibrium price paid by the buyers is 60. So we get exactly the same conclusions as before. Before the tax, 45 units are exchanged, with the buyers paying 55 for each unit and the sellers receiving 55 for each unit. With the tax only 40 units are exchanged, with the buyers paying 60 for each unit, the sellers receiving 50 for each unit and the government taking 10 in tax on each unit. 27.4: The Effect on the Surpluses We have seen that the tax has the effect of reducing the quantity exchanged in the market. In this section we investigate the effect that the tax has on the surpluses. First we note the surpluses before the tax. They are shown in figure Always (but see the next footnote) 10 less than the price paid by the buyers. 3 Strictly speaking the price should be 10 which implies that the sellers pay 10 for every unit sold. But clearly this makes no sense.
6 The buyer surplus is the area between the price (paid) and the demand curve in this case 0.5 x 45 x 45 = The seller surplus is the area between the price (received) and the supply curve in this case 0.5 x 45 x 45 = To analyse the position with the tax we will find it useful to use a slightly different diagram one that contains the original demand and supply curves and the new equilibrium. We can do this by noting the properties of the new equilibrium: that the tax drives a wedge between the price that buyers pay and the price that sellers receive and this wedge is exactly equal to the tax. We can think of the equilibrium quantity as the quantity at which the vertical distance between the demand and supply curves is exactly equal to the tax. Figure 27.8 illustrates though you should be careful if you are using this kind of diagram to explain exactly what it is that you are illustrating. The quantity indicated is the new equilibrium quantity. It is so because the vertical gap between the demand curve and the supply curve at that quantity (note that it is unique) is exactly equal to the tax (10). The price given by the demand curve at the quantity of 40 is the new equilibrium price paid by the buyers. The price given by the supply curve at the quantity of 40 is the new equilibrium price received by the sellers. The new buyer surplus is the area indicated between the new price paid by the buyers and the demand curve. The new surplus is 0.5 x 40 x 40 = 800, giving a loss of surplus of The new seller surplus is the area indicated between the new price received by the sellers and the supply curve. The new surplus is 0.5 x 40 x 40 = 800, giving a loss of surplus of The government raises money through the tax this is the area bounded by the two prices (the price paid by the buyers and the price received by the sellers and the quantity exchanged. In figure 27.8 the tax yield is the rectangle with area 40 x 10 = 400. The government takes most of the reduction in the surpluses of the buyers and sellers. But there is a bit of the original surpluses that no-one gets not the buyers, not the sellers, not the government it just disappears from the market, because the quantity exchanged has fallen. This
7 lost surplus is the triangular area illustrated in the figure below. In this example, its magnitude is 0.5 x 5 x 10 = 25. This is called the deadweight loss of the tax. If we do the accounts we find that Original surpluses: buyers Sellers Total 2025 New surpluses: buyers 800 Sellers 800 Government 400 Total 2000 Deadweight loss of tax 25 So the tax causes a loss of surplus. In this example the magnitude is quite small but this depends on a number of things including the reduction in the quantity traded. It is this reduction that causes the loss of surplus as there were trades being consummated before the tax that are no longer being consummated. The tax causes fewer trades and hence a lower surplus. 27.5: A Proportional Tax The crucial point about all off the above is that the tax causes the demand curve to shift downwards (when the price variable on the vertical axis is the price received by sellers) and causes the supply curve to shift upwards (when the price variable on the vertical axis is the price paid by the buyers) with the magnitude of the vertical shift exactly equalling the amount of the tax. We showed that this was the case with a flat rate tax but it is true with any kind of tax including a proportional tax. Let us consider this case now. We take a 20% tax. So the price paid by the buyers is 20% more than the price received by sellers and the difference is the tax. Let us consider the same case as before so our starting position is figure Let us again consider the analysis with the two different price variables first starting where the price is the price paid by the buyers. In this case, as we know, the supply curve shifts. We can found out to where algebraically or numerically. Algebraically we have p b = 1.2 p s
8 because the buyers pay 20% more than the sellers. Substituting this in the supply curve (27.2) gives us the new supply curve as a function of the price paid by buyers: If we graph this we get figure q s = p b / Alternatively we can use numbers. Proceeding as before we have the following table and when we graph the final two columns we get figure Price received by the sellers Supply Price paid by the buyers In figure the downward-sloping line is the (new and old) demand curve. The thin upwardsloping line is the original supply curve and the thick upward-sloping line is the new supply curve. Notice that the vertical gap between the old and the new curves is exactly the tax the new curve is 20% higher than the old even at the intercept. Why? Because to produce a given quantity the sellers need the buyers to pay 20% more than they did originally the 20% which goes to the government in tax. The new equilibrium is where the (new and old) demand curve intersects the new supply curve. As it happens this is at a quantity 40 and a price paid by the buyers of 60 this, in turn, implies a new price received by the sellers of 50. Note that 50 plus 20% equals 60. It is pure coincidence that the tax of 20% has exactly the same effect as a tax of 10 per unit. In general, rather obviously, different taxes will have different effects. 4 Notice that the intercept of the supply curve is at a price of 24 which is 20% higher than the original intercept. 5 Always 20% more than the price received by the sellers.
9 We can, once again, do all the analysis with the price received by sellers on the vertical axis. If we do, the supply curve is the original supply curve as the price relevant to the sellers is the price that they receive. However, the demand curve moves as the price relevant to the buyers is the price that they pay. To find the demand as a function of the price received by sellers we need to substitute (27.4) into the demand curve (27.1). This gives us q d = p s as the relevant schedule. Plotted we get figure Alternatively we can use numbers. Proceeding as before we have the following table and when we graph the final two columns we get figure We note that the first column is always 20% more than the final column. Price paid by the buyers Demand Price received by the sellers ⅓ ⅔ ⅓ ⅔ ⅓ ⅔ ⅓ In figure the upward-sloping line is the (new and old) supply curve. The thin downwardsloping line is the original demand curve and the thick downward-sloping line is the new demand curve. Notice that the vertical gap between the old and the new curves is exactly the tax the old curve is 20% higher than the new even at the intercept. Why? Because to buy a given quantity the buyers need the sellers to sell for 20% less than they did originally the 20% which goes to the government in tax. The new equilibrium is where the (new and old) supply curve intersects the new demand curve. As before, obviously, this is at a quantity 40 and a price received by the sellers of 50 this, in turn, implies a new price paid by the buyers of 60. Note that 50 plus 20% equals Always such that the price paid by the buyers is20% more than this.
10 We notice that once again the tax drives a wedge between the price paid by the buyers and the price received by the sellers. In this instance, because the 20% tax has exactly the same effect at the fixed-rate tax of 10, which we analysed earlier, and because we started in exactly the same position the effect on the surpluses is exactly as it was before. In particular there is a deadweight loss of surplus caused by the tax. 27.6: Who Pays the Tax? In the example above all the effects were nicely symmetrical: the price paid by the buyers went up by 5 and the price received by the sellers went down by 5. So the buyers paid half the tax of 10 and the sellers paid half the tax of 10. Moreover the effect on the surpluses was symmetrical both buyers and sellers lost the same part of their surplus to the government and the same part to the deadweight loss. The reason for this symmetry is that the demand and supply curves were nicely symmetrical. If they were not there is no reason why the effects should be symmetrical. This section looks at asymmetrical cases and answers the question who pays the tax? in these cases. As may be apparent the answer depends upon the slope of the demand and supply curves. We consider four cases, in which we consider three possibilities flat, average and steep where by average we mean a case in between flat and steep: 1) demand average, supply flat 2) demand average, supply steep 3) demand flat, supply average 4) demand steep, supply average You may like to consider other cases yourself. In each case we take a flat-rate tax equal to 10. If the demand curve is of average steepness but the supply curve is very flat, we have the position pictured in figure The original equilibrium has a quantity of 45 and a price of just under 55. The fact that the supply curve is very flat indicates that it is very sensitive to the price: small increases in the price lead to large increases in the quantity supplied. You will see that originally the buyer surplus is very high and the seller surplus very low. With the tax the quantity exchanged falls to a little under 37. The price paid by the buyers increases from just under 55 to almost 64 a rise of almost 9. In contrast the price received by the sellers falls from just under 55 to just under 54 a fall of just over 1. In this case, the tax of 10 is almost all paid for by the buyers as they were less sensitive to the price than the sellers. Note that there is a large fall in the buyer surplus but only a modest fall in the seller surplus.
11 If the demand curve is of average steepness but the supply curve is very steep, we have the position pictured in figure The original equilibrium has a quantity of just over 54 and a price of around The steepness of the supply curve indicates that it is not very responsive to the price. Notice that there are large buyer and seller surpluses. In the new equilibrium the quantity exchanged falls very little to just under 54 (because the supply curve is steep). The price paid by the buyers rises from around 45.5 to around 46.5 a rise of just 1. The price received by sellers, however, falls from around 45.5 to almost 36 a fall of about 9 the reason being that the supply is not very sensitive to the price. The sellers pay the tax. There is a small fall in the buyer surplus but a large fall in the seller surplus. In this case the deadweight loss of the tax is very small because the quantity exchanged falls very little. If the demand curve is very flat but the supply curve is of average slope, we have the position pictured in figure The original equilibrium has a quantity of 36.5 and a price of just over 46. It will be seen that the buyer surplus is very small because the demand curve is flat, indicating that the demand is very sensitive to the price. The tax causes a big reduction in the quantity exchanged because the demand is very sensitive to the price. For the same reason the price paid by the buyers rises very little from just over 46 to around 47. In contrast the price received by the sellers falls a lot from just over 46 to around 37 and there is a big fall in the seller surplus. In this case the sellers bear most of the burden of the tax. There is a large deadweight loss because the quantity exchanged falls considerably. Finally, if the demand curve is very steep but the supply curve is of average slope, we have the position pictured in figure The original equilibrium has a quantity of just under 45 and a price of just over 54. There are large buyer and seller surpluses.
12 In the new equilibrium the quantity exchanged falls just a little - from just under 45 to a little under 44. As a consequence the deadweight loss is rather small. The price paid by the buyers rises sharply from just over 54 to almost 64 the reason being that the demand is rather insensitive to the price. In contrast there is just a small fall in the price received by the sellers from just over 54 to just under 54. In this case the tax burden is almost all taken by the buyers because the demand is rather insensitive to the price. The conclusion to be drawn is that the effects of the tax depend upon the form of the demand and supply schedules. If one of the two is relatively insensitive to the price then that side of the market bears the burden of the tax. If one of the two is relatively sensitive to the price then the other side of the market bears the burden of the tax. 27.7: Summary The crucial point when analysing the effect of a tax on a market is that there are two prices when there is a tax: the price that buyers pay and the price that sellers receive. If the price variable is the price paid by the buyers then the demand curve does not move but the supply curve moves up vertically by the amount of the tax. If the price variable is the price received by the sellers then the supply curve does not move but the demand curve moves down vertically by the amount of the tax. A tax causes a reduction in the surpluses going to the buyers and sellers and also causes an overall loss of surplus generated by the market the deadweight loss of the tax. The shape of the demand and supply schedules determines the tax burden and the size of the deadweight loss. Generally the less sensitive is the schedule the greater the burden of the tax. 27.8: Indirect or direct taxation? Direct taxation is the term that economists use for taxes on income (in any form, including profits). Indirect taxation is the term used for taxes on expenditure the kind of taxes that we have been considering in this chapter. One clear message from this chapter is that this form of taxation causes
13 a deadweight loss some of the surplus previously generated by the market disappears when taxation is introduced. The inference from this message might be that this form of taxation is therefore necessarily bad. Here we consider whether this is, in fact, the case. We use a very simple story with linear demand and supply curves like the one we have told in this chapter. Consider a market without tax where the demand and supply curves are as in the figure below. The equilibrium price is 50, the equilibrium quantity is 50, the buyer surplus is 1250 and the seller surplus is 1250, giving a total surplus of Now suppose the government introduces a flat-rate tax of 20 on the good. Then new equilibrium price paid by the buyers becomes 60, the equilibrium price received by the sellers is 40 (the difference between the two being the tax of 20, of course), the surplus of the buyers becomes 800, the surplus of the sellers becomes 800, the government gets 800 in tax and there is a deadweight loss of 100 as shown in the figure below.
14 The total surplus is now just 2400 the deadweight loss of 100 represents the loss of surplus generated in the market as a consequence of the introduction of the tax. Critics might say that this is inefficient. A more efficient situation might be to levy the tax directly on the incomes of the agents involved. Let us see what happens if the government, instead of levying the tax indirectly, does so directly. The analysis of one side of the market might be simple. If the suppliers consist of firms whose objective is to maximise profits, and if the direct tax introduced by the government is a tax on profits then there is no shift in the supply curve. The quantity of output at which pre-tax profits is maximised must be the same quantity at which post-tax profits are maximised if the tax simply takes a proportion of the profits. You should be clear about this. If we denote profits by π and output by q, and if we suppose that the government takes a proportion t of the profits in tax, then the without-tax optimisation problem is to choose that q which maximises π, while the with-tax optimisation problems is to choose that q which maximises tπ. Clearly the solution is the same. Multiplying the objective by a constant changes nothing 7. So the supply curve might not shift. But the demand curve might, if the tax is on income and income affects demand. In general (that is, if the preferences are not quasi-linear), we would expect income to affect demand and we would therefore expect an increase in income tax to lower incomes and thus affect demand. We would expect therefore that the demand curve would shift down. In general, it is not clear how much it would shift down as this would depend on the amount of the tax and the responsiveness of demand to income. One possibility is illustrated in the graph below, in which we have drawn the supply curve unchanged, and the demand curve shifted down by 10. In this we have no indirect taxation. Here the equilibrium price is 45, the equilibrium quantity is 45, the surplus of the buyers and the surplus of the sellers is The government takes no indirect tax but has the revenue from the direct taxation. Note here the total surplus is This is less than the original total surplus of 2500 before any tax was introduced. This last situation is efficient in terms of the market, but less surplus is generated than initially. There is, of course, however, the tax revenue raised by the direct taxation. 7 We should make one proviso. If the profits become negative then the firm may prefer to go out of business. If that happens we lose a bit of the supply. But it the tax is proportional and the pre-tax profit is positive, then so must the posttax profit.
15 We cannot conclude from this analysis whether one method of taxation is better than another, though we have shown the tools that economists can use to analyse the situation. But note: we have analysed only a part of the problem. The taxation will also have implications in other markets. There will be spillover effects elsewhere other prices will be affected and other quantities. To take into account all such effects we would need to do what is called General Equilibrium analysis, which is way beyond the scope of this book.
16
I. Introduction to Taxation
University of Pacific-Economics 53 Lecture Notes #17 I. Introduction to Taxation Government plays an important role in most modern economies. In the United States, the role of the government extends from
More informationChapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline
Chapter 3 The Concept of Elasticity and Consumer and roducer Surplus Chapter Objectives After reading this chapter you should be able to Understand that elasticity, the responsiveness of quantity to changes
More informationWeb Supplement to Chapter 2
Web upplement to Chapter 2 UPPLY AN EMAN: TAXE 21 Taxes upply and demand analysis is a very useful tool for analyzing the effects of various taxes In this Web supplement, we consider a constant tax per
More informationElasticity. I. What is Elasticity?
Elasticity I. What is Elasticity? The purpose of this section is to develop some general rules about elasticity, which may them be applied to the four different specific types of elasticity discussed in
More informationCHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY
CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize
More information4 THE MARKET FORCES OF SUPPLY AND DEMAND
4 THE MARKET FORCES OF SUPPLY AND DEMAND IN THIS CHAPTER YOU WILL Learn what a competitive market is Examine what determines the demand for a good in a competitive market Chapter Overview Examine what
More informationManagerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd )
(Refer Slide Time: 00:28) Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay Lecture - 13 Consumer Behaviour (Contd ) We will continue our discussion
More informationOne Period Binomial Model
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 One Period Binomial Model These notes consider the one period binomial model to exactly price an option. We will consider three different methods of pricing
More informationLab 17: Consumer and Producer Surplus
Lab 17: Consumer and Producer Surplus Who benefits from rent controls? Who loses with price controls? How do taxes and subsidies affect the economy? Some of these questions can be analyzed using the concepts
More informationANSWERS TO END-OF-CHAPTER QUESTIONS
ANSWERS TO END-OF-CHAPTER QUESTIONS 9-1 Explain what relationships are shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment-demand curve, and (d) the investment schedule.
More informationDemand, Supply and Elasticity
Demand, Supply and Elasticity CHAPTER 2 OUTLINE 2.1 Demand and Supply Definitions, Determinants and Disturbances 2.2 The Market Mechanism 2.3 Changes in Market Equilibrium 2.4 Elasticities of Supply and
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Chapter 6 - Markets in Action - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The short-run impact of the San Francisco earthquake
More informationEcon 101: Principles of Microeconomics
Econ 101: Principles of Microeconomics Chapter 14 - Monopoly Fall 2010 Herriges (ISU) Ch. 14 Monopoly Fall 2010 1 / 35 Outline 1 Monopolies What Monopolies Do 2 Profit Maximization for the Monopolist 3
More informationECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS
ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot
More informationChapter 25: Exchange in Insurance Markets
Chapter 25: Exchange in Insurance Markets 25.1: Introduction In this chapter we use the techniques that we have been developing in the previous 2 chapters to discuss the trade of risk. Insurance markets
More informationSUPPLY AND DEMAND : HOW MARKETS WORK
SUPPLY AND DEMAND : HOW MARKETS WORK Chapter 4 : The Market Forces of and and demand are the two words that economists use most often. and demand are the forces that make market economies work. Modern
More informationEmployment and Pricing of Inputs
Employment and Pricing of Inputs Previously we studied the factors that determine the output and price of goods. In chapters 16 and 17, we will focus on the factors that determine the employment level
More informationStudy Questions for Chapter 9 (Answer Sheet)
DEREE COLLEGE DEPARTMENT OF ECONOMICS EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002 M-W-F 13:00-13:50 Dr. Andreas Kontoleon Office hours: Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:00-17:00 Study
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that
More information4. Answer c. The index of nominal wages for 1996 is the nominal wage in 1996 expressed as a percentage of the nominal wage in the base year.
Answers To Chapter 2 Review Questions 1. Answer a. To be classified as in the labor force, an individual must be employed, actively seeking work, or waiting to be recalled from a layoff. However, those
More informationchapter >> Consumer and Producer Surplus Section 4: Applying Consumer and Producer Surplus: The Efficiency Costs of a Tax
chapter 6 >> Consumer and Producer urplus ection 4: Applying Consumer and Producer urplus: The fficiency Costs of a Tax The concepts of consumer and producer surplus are extremely useful in many economic
More informationWeek 1: Functions and Equations
Week 1: Functions and Equations Goals: Review functions Introduce modeling using linear and quadratic functions Solving equations and systems Suggested Textbook Readings: Chapter 2: 2.1-2.2, and Chapter
More informationChapter 8. Competitive Firms and Markets
Chapter 8. Competitive Firms and Markets We have learned the production function and cost function, the question now is: how much to produce such that firm can maximize his profit? To solve this question,
More information7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts
Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),
More informationIn this chapter, you will learn to use cost-volume-profit analysis.
2.0 Chapter Introduction In this chapter, you will learn to use cost-volume-profit analysis. Assumptions. When you acquire supplies or services, you normally expect to pay a smaller price per unit as the
More informationMicroeconomics Topic 3: Understand how various factors shift supply or demand and understand the consequences for equilibrium price and quantity.
Microeconomics Topic 3: Understand how various factors shift supply or demand and understand the consequences for equilibrium price and quantity. Reference: Gregory Mankiw s rinciples of Microeconomics,
More informationEcon 202 Exam 2 Practice Problems
Econ 202 Exam 2 Practice Problems Principles of Microeconomics Dr. Phillip Miller Multiple Choice Identify the choice that best completes the statement or answers the question. Chapter 6 1. If a binding
More informationPre Test Chapter 3. 8.. DVD players and DVDs are: A. complementary goods. B. substitute goods. C. independent goods. D. inferior goods.
1. Graphically, the market demand curve is: A. steeper than any individual demand curve that is part of it. B. greater than the sum of the individual demand curves. C. the horizontal sum of individual
More informationMonopoly WHY MONOPOLIES ARISE
In this chapter, look for the answers to these questions: Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect society s well-being?
More informationMidterm Exam #1 - Answers
Page 1 of 9 Midterm Exam #1 Answers Instructions: Answer all questions directly on these sheets. Points for each part of each question are indicated, and there are 1 points total. Budget your time. 1.
More informationAn increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.
1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.
More informationSelected Homework Answers from Chapter 3
elected Homework Answers from Chapter 3 NOTE: To save on space, I have not given specific labels to my axis, but rather stuck with just and. Ideally, you should put specific labels. For example, the vertical
More informationor, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost:
Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.
More informationTable of Contents MICRO ECONOMICS
economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...
More informationProblem Set #5-Key. Economics 305-Intermediate Microeconomic Theory
Problem Set #5-Key Sonoma State University Economics 305-Intermediate Microeconomic Theory Dr Cuellar (1) Suppose that you are paying your for your own education and that your college tuition is $200 per
More informationMath 1526 Consumer and Producer Surplus
Math 156 Consumer and Producer Surplus Scenario: In the grocery store, I find that two-liter sodas are on sale for 89. This is good news for me, because I was prepared to pay $1.9 for them. The store manager
More informationc 2008 Je rey A. Miron We have described the constraints that a consumer faces, i.e., discussed the budget constraint.
Lecture 2b: Utility c 2008 Je rey A. Miron Outline: 1. Introduction 2. Utility: A De nition 3. Monotonic Transformations 4. Cardinal Utility 5. Constructing a Utility Function 6. Examples of Utility Functions
More informationChapter 3 Market Demand, Supply, and Elasticity
Chapter 3 Market Demand, Supply, and Elasticity After reading chapter 3, MARKET DEMAND, SUPPLY, AND ELASTICITY, you should be able to: Discuss the Law of Demand and draw a Demand Curve. Distinguish between
More informationAP Microeconomics 2003 Scoring Guidelines
AP Microeconomics 2003 Scoring Guidelines The materials included in these files are intended for use by AP teachers for course and exam preparation; permission for any other use must be sought from the
More informationLearning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly
Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision
More informationChapter. Perfect Competition CHAPTER IN PERSPECTIVE
Perfect Competition Chapter 10 CHAPTER IN PERSPECTIVE In Chapter 10 we study perfect competition, the market that arises when the demand for a product is large relative to the output of a single producer.
More informationA Detailed Price Discrimination Example
A Detailed Price Discrimination Example Suppose that there are two different types of customers for a monopolist s product. Customers of type 1 have demand curves as follows. These demand curves include
More informationDemand, Supply, and Market Equilibrium
3 Demand, Supply, and Market Equilibrium The price of vanilla is bouncing. A kilogram (2.2 pounds) of vanilla beans sold for $50 in 2000, but by 2003 the price had risen to $500 per kilogram. The price
More informationCHAPTER 3 CONSUMER BEHAVIOR
CHAPTER 3 CONSUMER BEHAVIOR EXERCISES 2. Draw the indifference curves for the following individuals preferences for two goods: hamburgers and beer. a. Al likes beer but hates hamburgers. He always prefers
More informationThe fundamental question in economics is 2. Consumer Preferences
A Theory of Consumer Behavior Preliminaries 1. Introduction The fundamental question in economics is 2. Consumer Preferences Given limited resources, how are goods and service allocated? 1 3. Indifference
More informationExample 1: Suppose the demand function is p = 50 2q, and the supply function is p = 10 + 3q. a) Find the equilibrium point b) Sketch a graph
The Effect of Taxes on Equilibrium Example 1: Suppose the demand function is p = 50 2q, and the supply function is p = 10 + 3q. a) Find the equilibrium point b) Sketch a graph Solution to part a: Set the
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a
More informationBailouts and Stimulus Plans. Eugene F. Fama
Bailouts and Stimulus Plans Eugene F. Fama Robert R. McCormick Distinguished Service Professor of Finance Booth School of Business University of Chicago There is an identity in macroeconomics. It says
More informationChapter 14 Monopoly. 14.1 Monopoly and How It Arises
Chapter 14 Monopoly 14.1 Monopoly and How It Arises 1) One of the requirements for a monopoly is that A) products are high priced. B) there are several close substitutes for the product. C) there is a
More informationCHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition
CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates
More informationSolving Quadratic Equations
9.3 Solving Quadratic Equations by Using the Quadratic Formula 9.3 OBJECTIVES 1. Solve a quadratic equation by using the quadratic formula 2. Determine the nature of the solutions of a quadratic equation
More informationc. Given your answer in part (b), what do you anticipate will happen in this market in the long-run?
Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm
More informationAnswers to Text Questions and Problems. Chapter 22. Answers to Review Questions
Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services
More information3.3 Applications of Linear Functions
3.3 Applications of Linear Functions A function f is a linear function if The graph of a linear function is a line with slope m and y-intercept b. The rate of change of a linear function is the slope m.
More informationSHORT-RUN FLUCTUATIONS. David Romer. University of California, Berkeley. First version: August 1999 This revision: January 2012
SHORT-RUN FLUCTUATIONS David Romer University of California, Berkeley First version: August 1999 This revision: January 2012 Copyright 2012 by David Romer CONTENTS Preface vi I The IS-MP Model 1 I-1 Monetary
More informationNotes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation. Jon Bakija
Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation Jon Bakija This example shows how to use a budget constraint and indifference curve diagram
More informationProfit Maximization. 2. product homogeneity
Perfectly Competitive Markets It is essentially a market in which there is enough competition that it doesn t make sense to identify your rivals. There are so many competitors that you cannot single out
More informationReview of Fundamental Mathematics
Review of Fundamental Mathematics As explained in the Preface and in Chapter 1 of your textbook, managerial economics applies microeconomic theory to business decision making. The decision-making tools
More informationMidterm Exam - Answers. November 3, 2005
Page 1 of 10 November 3, 2005 Answer in blue book. Use the point values as a guide to how extensively you should answer each question, and budget your time accordingly. 1. (8 points) A friend, upon learning
More informationChapter 4 Online Appendix: The Mathematics of Utility Functions
Chapter 4 Online Appendix: The Mathematics of Utility Functions We saw in the text that utility functions and indifference curves are different ways to represent a consumer s preferences. Calculus can
More informationChapter 04 Firm Production, Cost, and Revenue
Chapter 04 Firm Production, Cost, and Revenue Multiple Choice Questions 1. A key assumption about the way firms behave is that they a. Minimize costs B. Maximize profit c. Maximize market share d. Maximize
More informationPre-Test Chapter 18 ed17
Pre-Test Chapter 18 ed17 Multiple Choice Questions 1. (Consider This) Elastic demand is analogous to a and inelastic demand to a. A. normal wrench; socket wrench B. Ace bandage; firm rubber tie-down C.
More informationIn following this handout, sketch appropriate graphs in the space provided.
Dr. McGahagan Graphs and microeconomics You will see a remarkable number of graphs on the blackboard and in the text in this course. You will see a fair number on examinations as well, and many exam questions,
More informationECO209 MACROECONOMIC THEORY. Chapter 11
Prof. Gustavo Indart Department of Economics University of Toronto ECO209 MACROECONOMIC THEORY Chapter 11 MONEY, INTEREST, AND INCOME Discussion Questions: 1. The model in Chapter 9 assumed that both the
More information6. Which of the following is likely to be the price elasticity of demand for food? a. 5.2 b. 2.6 c. 1.8 d. 0.3
Exercise 2 Multiple Choice Questions. Choose the best answer. 1. If a change in the price of a good causes no change in total revenue a. the demand for the good must be elastic. b. the demand for the good
More informationPricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young
Chapter 9 Pricing and Output Decisions: i Perfect Competition and Monopoly M i l E i E i Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Pricing and
More informationMICROECONOMIC PRINCIPLES SPRING 2001 MIDTERM ONE -- Answers. February 16, 2001. Table One Labor Hours Needed to Make 1 Pounds Produced in 20 Hours
MICROECONOMIC PRINCIPLES SPRING 1 MIDTERM ONE -- Answers February 1, 1 Multiple Choice. ( points each) Circle the correct response and write one or two sentences to explain your choice. Use graphs as appropriate.
More informationMarket Structure: Perfect Competition and Monopoly
WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit
More informationModule 49 Consumer and Producer Surplus
What you will learn in this Module: The meaning of consumer surplus and its relationship to the demand curve The meaning of producer surplus and its relationship to the supply curve Module 49 Consumer
More informationMaximising Consumer Surplus and Producer Surplus: How do airlines and mobile companies do it?
Maximising onsumer Surplus and Producer Surplus: How do airlines and mobile companies do it? This is a topic that has many powerful applications in understanding economic policy applications: (a) the impact
More informationChapter 9. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson Addison-Wesley. All rights reserved
Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Chapter Outline The FE Line: Equilibrium in the Labor Market The IS Curve: Equilibrium in the Goods Market The LM Curve:
More informationChapter 14 Monopoly. 14.1 Monopoly and How It Arises
Chapter 14 Monopoly 14.1 Monopoly and How It Arises 1) A major characteristic of monopoly is A) a single seller of a product. B) multiple sellers of a product. C) two sellers of a product. D) a few sellers
More informationTeaching and Learning Guide 3: Linear Equations Further Topics
Guide 3: Linear Equations Further Topics Table of Contents Section 1: Introduction to the guide...3 Section : Solving simultaneous equations using graphs...4 1. The concept of solving simultaneous equations
More informationElements of a graph. Click on the links below to jump directly to the relevant section
Click on the links below to jump directly to the relevant section Elements of a graph Linear equations and their graphs What is slope? Slope and y-intercept in the equation of a line Comparing lines on
More informationThe Point-Slope Form
7. The Point-Slope Form 7. OBJECTIVES 1. Given a point and a slope, find the graph of a line. Given a point and the slope, find the equation of a line. Given two points, find the equation of a line y Slope
More informationEquilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits.
Equilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits. Profit depends upon two factors Revenue Structure Cost Structure
More informationExamples on Monopoly and Third Degree Price Discrimination
1 Examples on Monopoly and Third Degree Price Discrimination This hand out contains two different parts. In the first, there are examples concerning the profit maximizing strategy for a firm with market
More informationMonopolistic Competition
In this chapter, look for the answers to these questions: How is similar to perfect? How is it similar to monopoly? How do ally competitive firms choose price and? Do they earn economic profit? In what
More informationTHE THEORY OF ECONOMIC VALUE
THE THEORY OF ECONOMIC VALUE by Michael Huemer 1. Basic Assumptions of Economics People want things, and they tend to act in such a way as to get the things they want, 1 to the best of their ability. Sometimes
More informationCHAPTER 9 Building the Aggregate Expenditures Model
CHAPTER 9 Building the Aggregate Expenditures Model Topic Question numbers 1. Consumption function/apc/mpc 1-42 2. Saving function/aps/mps 43-56 3. Shifts in consumption and saving functions 57-72 4 Graphs/tables:
More informationCHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION
CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION Chapter in a Nutshell Now that we understand the characteristics of different market structures, we ask the question
More informationThe Graphical Method: An Example
The Graphical Method: An Example Consider the following linear program: Maximize 4x 1 +3x 2 Subject to: 2x 1 +3x 2 6 (1) 3x 1 +2x 2 3 (2) 2x 2 5 (3) 2x 1 +x 2 4 (4) x 1, x 2 0, where, for ease of reference,
More informationSection 1.1 Linear Equations: Slope and Equations of Lines
Section. Linear Equations: Slope and Equations of Lines Slope The measure of the steepness of a line is called the slope of the line. It is the amount of change in y, the rise, divided by the amount of
More informationRevenue Structure, Objectives of a Firm and. Break-Even Analysis.
Revenue :The income receipt by way of sale proceeds is the revenue of the firm. As with costs, we need to study concepts of total, average and marginal revenues. Each unit of output sold in the market
More informationChapter 6 Competitive Markets
Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a
More informationECON 600 Lecture 5: Market Structure - Monopoly. Monopoly: a firm that is the only seller of a good or service with no close substitutes.
I. The Definition of Monopoly ECON 600 Lecture 5: Market Structure - Monopoly Monopoly: a firm that is the only seller of a good or service with no close substitutes. This definition is abstract, just
More informationSession 7 Bivariate Data and Analysis
Session 7 Bivariate Data and Analysis Key Terms for This Session Previously Introduced mean standard deviation New in This Session association bivariate analysis contingency table co-variation least squares
More informationQuantity of trips supplied (millions)
Taxes chapter: 7 1. The United tates imposes an excise tax on the sale of domestic airline tickets. Let s assume that in 2010 the total excise tax was $6.10 per airline ticket (consisting of the $3.60
More informationMap Patterns and Finding the Strike and Dip from a Mapped Outcrop of a Planar Surface
Map Patterns and Finding the Strike and Dip from a Mapped Outcrop of a Planar Surface Topographic maps represent the complex curves of earth s surface with contour lines that represent the intersection
More informationEconomics 201 Fall 2010 Introduction to Economic Analysis Problem Set #6 Due: Wednesday, November 3
Economics 201 Fall 2010 Introduction to Economic Analysis Jeffrey Parker Problem Set #6 Due: Wednesday, November 3 1. Cournot Duopoly. Bartels and Jaymes are two individuals who one day discover a stream
More informationPracticed Questions. Chapter 20
Practiced Questions Chapter 20 1. The model of aggregate demand and aggregate supply a. is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution
More informationElasticity: The Responsiveness of Demand and Supply
Chapter 6 Elasticity: The Responsiveness of Demand and Supply Chapter Outline 61 LEARNING OBJECTIVE 61 The Price Elasticity of Demand and Its Measurement Learning Objective 1 Define the price elasticity
More informationPERPETUITIES NARRATIVE SCRIPT 2004 SOUTH-WESTERN, A THOMSON BUSINESS
NARRATIVE SCRIPT 2004 SOUTH-WESTERN, A THOMSON BUSINESS NARRATIVE SCRIPT: SLIDE 2 A good understanding of the time value of money is crucial for anybody who wants to deal in financial markets. It does
More informationCHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY
CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How
More informationForward exchange rates
Forward exchange rates The forex market consists of two distinct markets - the spot foreign exchange market (in which currencies are bought and sold for delivery within two working days) and the forward
More informationCHAPTER 9: PURE COMPETITION
CHAPTER 9: PURE COMPETITION Introduction In Chapters 9-11, we reach the heart of microeconomics, the concepts which comprise more than a quarter of the AP microeconomics exam. With a fuller understanding
More informationPrinciples of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9
Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 print name on the line above as your signature INSTRUCTIONS: 1. This Exam #2 must be completed within the allocated time (i.e., between
More informationThe Keynesian Cross. A Fixed Price Level. The Simplest Keynesian-Cross Model: Autonomous Consumption Only
The Keynesian Cross Some instructors like to develop a more detailed macroeconomic model than is presented in the textbook. This supplemental material provides a concise description of the Keynesian-cross
More informationLABOR UNIONS. Appendix. Key Concepts
Appendix LABOR UNION Key Concepts Market Power in the Labor Market A labor union is an organized group of workers that aims to increase wages and influence other job conditions. Craft union a group of
More informationChapter 8 Application: The Costs of Taxation
Chapter 8 Application: The Costs of Taxation Review Questions What three factors must be taken into account in order to fully understand the effect of taxes on economic well-being? ANSWER: In order to
More information