For each of the markets and taxes described below, draw a generic graph, fully labelled, that reflects the market’s elasticities of supply and demand use the wedge method to show in a general way the levels of the Pb and Ps that the tax causes (or would cause) on the market explain which side of the market bears (or would bear) most of the burden of the tax and which side “escapes.” (a) The Michigan market for cigarettes, where demand is highly inelastic and supply is highly elastic, and where before tax the equilibrium price is $5.50 per pack. A combined federal and state tax of $3 per pack is imposed. (b) The market for restaurant meals on 8th Street in Holland, where supply is inelastic and demand is elastic, the current equilibrium price is $18, and the City of Holland is considering a $7 tax per meal served. (c) The US market for domestic air travel, where ES and |ED| = 1.5, and average fares in the absence of taxes are $265. A $70 federal tax is imposed.
B1.
1. For each of the markets and taxes described below,
draw a generic graph, fully labelled, that reflects the market’s elasticities of supply and demand
use the wedge method to show in a general way the levels of the Pb and Ps that the tax causes (or would cause) on the market
explain which side of the market bears (or would bear) most of the burden of the tax and which side “escapes.”
(a) The Michigan market for cigarettes, where demand is highly inelastic and supply is highly elastic, and where before tax the
(b) The market for restaurant meals on 8th Street in Holland, where supply is
(c) The US market for domestic air travel, where ES and |ED| = 1.5, and average fares in the absence of taxes are $265. A $70 federal tax is imposed.
(d) For (c) above, on your graph show/indicate the areas that correspond to CS, PS, tax revenue, and the DWL after the tax is imposed.
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