Suppose the demand for a good is given by Qd=1000-100P and the supply is given by Qs=100P. Suppose the state requires that producers pay $2 in taxes out of whatever price P per unit they receive.
(1) Graph the pre-tax supply and demand curves.
(2) What is the equilibrium price and quantity before the tax?
(3) What is the price elasticity of supply at the equilibrium? Assume a 10% increase in price.
(4) What is the price elasticity of demand at the equilibrium? Assume a 10% increase in price.
(5) What is the equilibrium price and quantity after the tax? (Hint: Consumers pay P but producers receive P-2.)
(6) How much tax revenue would have been raised if consumers and producers had not changed their behavior in response to the tax?
(7) How much tax revenue is actually raised?
(8) Who bears the statutory incidence of the tax?
(9) Who bears the economic incidence of the tax?