Suppose the elasticity of demand for leather coats is -1.75. The elasticity of supply for leather coats is .55. The elasticity of demand for fleece coats is -.75, while the elasticity of supply for fleece coats is 1.25.
a. The government imposes a tax of $20 per coat on all types of coats. How much has the after-tax price changed in each market compared to the non-tax case?
b. Suppose the untaxed market equilibrium price and quantity is $400 and 2 million, respectively, for the leather coats, and $50 and 20 million, respectively, for the fleece coats. What is the deadweight loss in the market for all coats resulting from the tax?
c. Use the information from b. to continue. Suppose the government eliminates the tax on fleece coats, and raises taxes on the leather coats to roughly make up for the lost revenue. Since there were 10x as many fleece as leather, the government raises the tax on the leather coats by a factor of 10 to $200 per coat. Calculate the deadweight loss in the coat market now.
d. Provide a brief explanation for your result in c in comparison to b.