Author Question: Suppose the market for grass seed is expressed as Demand: QD = 100 - 2p Supply: QS = 3p Price ... (Read 136 times)

melina_rosy

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Suppose the market for grass seed is expressed as
 
  Demand: QD = 100 - 2p
  Supply: QS = 3p
 
  Price elasticity of supply is constant at 1. If the supply curve is changed to Q = 8p, price elasticity of supply is still constant at 1. Yet, with the new supply curve, consumers pay a larger share of a specific tax. Why?

Question 2

Tax preferences create more _____ than a broad-based income tax because they change the relative prices to the taxpayer of earning different types of income.
 
  a. welfare loss
  b. benefits
  c. taxable income
   d. tax avoidance



princessflame2016

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Answer to Question 1

Even though the elasticity of supply has not changed, the new supply curve intersects the old demand curve at a lower price where demand is relatively less elastic than at the higher price. Since the incidence of a specific tax on consumers is n/(n - e), where n is the price elasticity of supply and e is the price elasticity of demand, therefore when e increases (less elastic demand), the consumers' tax incidence is higher.

Answer to Question 2

a



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