CH 6

5. Suppose the government removes a tax on buyers of a good and levies a tax of the same
size on sellers of the good. How does this change in tax policy affect the price that
buyers pay sellers for this good, the amount buyers are out of pocket including the tax, the
amount sellers receive net of the tax, and the quantity of the good sold?
it simply reverses the tax and places it elsewhere, on the seller. if the seller's net price goes up, unless the
company eats the loss in revenue......of course, the consumer will pay a higher price for that item.
as to change in tax, the amount of tax the buyer plays will increase too, becasue the cost of the item is
higher.

7. What determines how the burden of a tax is divided between buyers and sellers? Why?
The elasticity of demand. Take an extreme cases of a highly elastic good and a highly inelastic good. In
the former case, the tax will cause demand for the good to plummet. This hurts sellers. In the latter case,
demand will not change much. Buyers will just have to pay more the same goods.

CH 7
7. The cost of producing flat-screen TVs has fallen over the past decade. Lets consider some
implications of this fact.
a. Draw a supply-and-demand diagram to show the effect of falling production costs on the price
and quantity of flat-screen TVs sold.
b. In your diagram, show what happens to consumer surplus and producer surplus.
c. Suppose the supply of flat-screen TVs is very elastic. Who benefits most from falling
production costsconsumers or producers of these TVs?

10. A friend of yours is considering two cell phone service providers. Provider A charges $120
per month for the service regardless of the number of phone calls made. Provider B does not
have a fixed service fee but instead charges $1 per minute for calls. Your friends monthly
demand for minutes of calling is given by the equation
QD _ 150 _ 50P, where P is the price of a minute.
a. With each provider, what is the cost to your friend of an extra minute on the phone?
b. In light of your answer to (a), how many minutes would your friend talk on the phone with
each provider?

c. How much would he end up paying each provider every month?

d. How much consumer surplus would he obtain with each provider? (Hint: Graph the demand
curve and recall the formula for the area of a triangle.)
e. Which provider would you recommend that your friend choose? Why?

CH 8
4. Suppose that the government imposes a tax on heating oil.
a. Would the deadweight loss from this tax likely be greater in the first year after it is
imposed or in the fifth year? Explain.

a. The deadweight loss from a tax on heating oil is likely to be greater in the fifth year
after it is imposed rather than the first year.
In the first year, the elasticity of demand is fairly low, as people who own oil heaters
arent likely to get rid of them right away. But over time they may switch to other energy
sources and people buying new heaters for their homes will more likely choose gas or electric, so
the tax will have a greater impact on quantity.
b. Would the revenue collected from this tax likely be greater in the first year after it is
imposed or in the fifth year? Explain.

b.
The tax revenue is likely to be higher in the first year after it is imposed than in
the fifth year.
In the first year, demand is more inelastic, so the quantity doesnt decline as much and tax
revenue is relatively high. As time passes and more people substitute away from oil, the
equilibrium quantity declines, as does tax revenue.
5. After economics class one day, your friend suggests that taxing food would be a good way
to raise revenue because the demand for food is quite inelastic. In what sense is taxing food a
good way to raise revenue? In what sense is it not a good way to raise revenue?
Good way to raise revenue because Food is inelastic and people will buy food anyway, so it would raise
money.
Not a good way to raise revenue because it is a tax where the burden falls proportionally higher on low
income families.

8. Suppose the government currently raises $100 million through a 1-cent tax on widgets, and
another $100 million through a 10-cent tax on gadgets. If the government doubled the tax rate
on widgets and eliminated the tax on gadgets, would it raise more tax revenue than it does
today, less tax revenue, or the same amount? Explain.
Answer: The government gets less revenue than today as long as each of the
demand and supply curves has elasticity greater than zero. Revenue equals Qt,
where t is the size of the unit tax. For revenue to double when tax doubles, Q
would need to stay the same. This would only happen when one of the supply
or demand curves has zero elasticity. As long as both supply and demand curves
have positive elasticity, Q decreases when t rises, so Qt less than doubles when
t doubles.
CH 9
2. The world price of wine is below the price that would prevail in Canada in the absence of
trade.
a. Assuming that Canadian imports of wine are a small part of total world wine production, draw
a graph for the Canadian market for wine under free trade. Identify consumer surplus, producer
surplus, and total surplus in an appropriate table.
b. Now suppose that an unusual shift of the Gulf Stream leads to an unseasonably cold summer
in Europe, destroying much of the grape harvest there. What effect does this shock have on the
world price of wine? Using your graph and table from part (a), show the effect on consumer
surplus, producer surplus, and total surplus in Canada. Who are the winners and losers? Is
Canada as a whole better or worse off?

3. Suppose that Congress imposes a tariff on imported autos to protect the U.S. auto industry
from foreign competition. Assuming that the United States is a price taker in the world auto
market, show the following on a diagram: the change in the quantity of imports, the loss to
U.S. consumers, the gain to U.S. manufacturers, government revenue, and the deadweight
loss associated with the tariff. The loss to consumers can be decomposed into three pieces:
a gain to domestic producers, revenue for the government, and a deadweight loss. Use your

diagram to identify these three pieces.

4. When Chinas clothing industry expands, the increase in world supply lowers the world price
of clothing.
a. Draw an appropriate diagram to analyze how this change in price affects consumer surplus,
producer surplus, and total surplus in a nation that imports clothing, such as the United States.
b. Now draw an appropriate diagram to show how this change in price affects consumer surplus,
producer surplus, and total surplus in a nation that exports clothing, such as the Dominican
Republic.
c. Compare your answers to parts (a) and (b). What are the similarities and what are the
differences? Which country should be concerned about the expansion of the Chinese textile
industry? Which country should be applauding it? Explain.