Economic policy prescription of taxing goods

Problem 1) Your boss, the mayor of a city, thought that she'd come up with a great way to raise city revenue: increase the tax on gasoline in the city! However, she discovered that the city was actually receiving less tax revenue after the gas tax increase than before. Incensed, she declared that the economic policy prescription of taxing goods with inelastic demand must be flawed. Comment.

Problem 2) Complete the table below, which represents the production costs for a typical firm. (Round numbers to the nearest tenth.)

TP           TFC         TVC        TC           AFC        AVC       ATC        MC

0              \$20         \$ 0        \$__           ---          ---          ---         ---

1              ___        27.5       ___          \$__         \$__        \$__        \$27.5

2              ___        46.8       ___           ___        23.4        ___        ___

3              ___        63.3       ___           ___         ___        ___        ___

4              ___        82.5       ___           5.0          ___        ___        ___

5              ___        106.7     126.7        ___          ___        ___        ___

6              ___        139.7     ___           ___          ___        ___        ___

7              ___        181        ___           ___          ___        28.7       ___

At what level of output do diminishing returns set in? How do you know?

Problem 3) Hotdogs are very cheap at the grocery store about \$2 for a package of 8, or 25 cents each. At a baseball game they cost \$3 each. Use the concept of price elasticity of demand to explain why.

Problem 4) The initial price of a cup of coffee is \$1, and at that price, 400 cups are demanded. If the price falls to \$0.90, the quantity demanded will increase to 500.

a. Calculate the (arc) price elasticity of demand for coffee.

b. Based on your answer, is the demand for coffee elastic or inelastic?

c. Based on your answer to a., if the price of coffee is increased by 10%, what will happen to the revenues from coffee? Carefully explain how you know.

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