04 Jun Spring 2015
Question
Econ411
Homework Assignment 6
Spring 2015
Name:
1. The government is considering imposing taxes on the sellers of certain classes of products. The first tax they are considering is a tax on 2% milk. The second is a tax on all dairy products. The third is a tax on all food products. Which of these three taxes would you expect to have the largest impact on the sticker prices of the taxed products?
2. The nation of Fishkasar has a tax rate of 10% on the first 20,000 walops (the national currency) of taxable income, then 25% on the next 30,000 walops, then 50% on all taxable income above 50,000 walops. Fishkasar provides a 4,000-walop exemption per family member.
a. Jamil’s family has three members and earns 50,000 walops per year. Calculate the family’s marginal and average tax rates.
b. Boba’s family has five members and earns 85,000 walops per year. Calculate the family’s marginal and average tax rates.
c. Suppose that Fishkasar changed its tax code to a flat tax of 30% with an 8,000- walop per family member exemption. Would this change in the tax system make the system more progressive, more regressive, or neither?
3. For commodity X, average cost is equal to marginal cost at every level of output. Assuming that the market for X is competitive and the demand curve is linear, analyze the effects when a unit tax of u dollars is imposed. Now analyze the effects of the same tax assuming that the market for X is a monopoly. Discuss the differences.
4. In an effort to reduce alcohol consumption, the government is considering a $1 tax on each gallon of liquor sold (the tax is levied on producers). Suppose that the demand curve is (where is the number of gallons of liquor demanded and P is the price per gallon), and the supply curve of liquor is (where is number of gallons supplied).
a. Compute how the tax affects the price paid by consumers and the price received by producers.
b. How much revenue does the tax raise for the government? How much of the revenue comes from consumers, and how much from producers?
c. Suppose that the demand for liquor is more elastic for younger drinkers than for older drinkers. Will the liquor tax be more, less, or equally effective at reducing liquor consumption among young drinkers? Explain.
5. Assume that in a given country, tax revenue, T, depends on income, I, according to the formula
Thus, for example, when a household has an income of $50,000, its tax burden is -4,000+0.2(50,000), or $6,000. Is this a progressive tax schedule? [Hint: compute average tax rates at several different levels of income.]
Now let’s generalize the tax schedule in this problem to where a and t are numbers. Write down a formula for the average tax rate as a function of the level of income. Show that the tax system is progressive if a is negative, and regressive if a is positive.
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