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Author Question: How is the incidence of a sales tax between the buyer and the seller determined? What will be an ... (Read 37 times)

rayancarla1

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on: Jun 29, 2018
How is the incidence of a sales tax between the buyer and the seller determined?
 
  What will be an ideal response?

Question 2

Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth 30,000 and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless.
 
  Suppose all SUV owners are like Andrew. An insurance company agrees to pay each person who has an accident the full value of his/her SUV. The company's operating expenses are 1,500. What is the minimum insurance premium that the company is willing to accept? A) 1,500 per year
  B) 4,500 per year
  C) 3,000 per year
  D) 6,000 per year


kbennett34

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Reply #1 on: Jun 29, 2018
Answer to Question 1

The tax incidence depends on the price elasticities of supply and demand. Buyers pay more of the tax the more inelastic the demand and the more elastic the supply. Sellers pay more of the tax the more elastic the demand and the more inelastic the supply.

Answer to Question 2

B


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