New equilibrium quantity-new gross-of-tax price


Part 1) Numerical answers are required.

In the absence of any taxes, the supply and demand curves for gizmos are as follows:

Supply: P = 20
Demand: P = 80- 4Q

Q1. Calculate the equilibrium price and quantity.

Q2. Calculate the total expenditure on gizmos.
Now, an Ad Valorem tax of t= 0.2 (a 20% tax) is placed on gizmos:

Q3. Calculate the new equilibrium quantity, the new gross-of-tax price, and the new net-of-tax price.

Q4. Calculate the dead weight loss (or excess burden) of the tax.
Now consider the case in which the demand curve is changed to P = 80- 3Q

Q5. Calculate the new equilibrium price and quantity in the absence of a tax.

Q6. Calculate the total expenditures on gizmos now.

Now, an Ad Valorem tax of t= 0.2 (a 20% tax) is placed on gizmos:

Q7. Calculate the new equilibrium quantity, the new gross-of-tax price, and the new net-of-tax price.

Q8. Calculate the dead weight loss (or excess burden) of the tax.

Q9. Compare your answers to parts d and h. Is the change in excess burden what you would expect? Explain.
{Hint: there is an equation that gives dead weight loss as a function of several components that have economic significance}

Part 2:

Q1. What does the Ramsey Rule for optimal commodity taxation state?

Q2. Use the Ramsey Rule to evaluate the efficiency of a single state sales tax rate on goods.

Q3. Given your answer to part b, what arguments could be made for why we see a single state sales tax rate on all goods?

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Taxation: New equilibrium quantity-new gross-of-tax price
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