Assignment:
1. The demand for sausages is Q = 280 - 8P and the supply of sausages is Q = 12P + 20. A per-sausage tax of $2 is levied on vendors. Calculate the after-tax price paid by consumers and the after-tax price received by sausage vendors. What would the price be without the tax?
2. The demand for cabbages is Q = 3,000 - 200P and the supply of cabbages is Q = -500 + 200P. If a $4 tax is levied on the sale of cabbages, who bears the statutory incidence? Who bears the economic incidence of this tax? How is it divided up?
3. The city of Marlboro is considering a 15% tax on the revenues of all tobacco grown inside the city limits. Tobacco in Marlboro has a distinct flavor, and smokers will likely pay some premium to purchase tobacco from Marlboro rather than tobacco from other towns.
Assume all land is equally well suited for farming by other crops given enough time, i.e., any Marlboro land not taken by a tobacco farm can eventually be converted to another farm. Mayor McSmokesalot wants your advice on who will pay the incidence of such a tax in the short run (one month) and the long run (five years).
a. What is the incidence of the tax in the short run? Answer intuitively, and use a diagram to illustrate.
b. What is the long-run incidence? Once again, use a diagram to illustrate.
c. How would your analysis in part (b) change if tobacco in nearby towns was a perfect substitute for the tobacco grown in Marlboro? What would happen to tax revenues?
For the following short answers, answer each question in no more than 4 sentences. (This may require that you write more than one draft and edit your answers.)
4. The government imposes taxes on the sellers of certain classes of products. The first tax they are considering is a tax on Lego sets. The second is a tax on construction and building playsets. The third is a tax on all toys. Which of these three taxes would you expect to have the largest impact on the sticker prices of the taxed products? Why?
5. If workers are paid minimum wage, how may tax incidence differ for a tax imposed on workers versus one imposed on employers?
6. Some taxes that are considered regressive in terms of current income, can be considered progressive when looked at in terms of tax incidence. How could this be the case?