## (solution) Economics 425 Homework 3 Lessons 5 and 6 1. The elasticity of

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Economics 425

Homework 3

Lessons 5 and 6 1. The elasticity of demand for home computers is -2.5, the elasticity of demand for business computers is -.90, and the

elasticity of supply for computers for both purposes is 1.

a.

b. 2. A per-unit tax of \$200 is imposed on the suppliers of computers. How much does the gross price increase in each

market? [Hint: first find the tax incidence/shares.]

Suppose the untaxed market equilibrium price and quantity in the home computer market are \$850 and 10 million,

respectively. In the business market, the untaxed market equilibrium price and quantity are \$1200 and 15 million,

respectively. What is the deadweight loss of the \$200 tax? The demand for a pack of 12 golf balls in Albuquerque is P=1000-.1Q, with supply P=30. The demand for golf clubs is

500-.2Q with supply P=75. The city government wishes to impose per-unit taxes on these goods in order to raise \$100,000 in

revenue to pay for improvements to the water supply system connected to the local golf courses. The government wishes to

do this by minimizing overall inefficiencies resulting from the taxes. What are the optimal tax rates that the government

should impose on each good?

[Note: This is a challenging but very doable problem that pulls together a lot of the material covered in Lesson 5. Don?t be

surprised or discouraged if you spend several hours working it out. Think carefully about how you set up your equations.

You?ll want to concentrate particularly on a) What tax scheme minimizes inefficiencies? What is the key equation for such a

scheme, especially in light of the perfectly elastic supply curves? We did the case where P=1 in lecture, and you did it for any

price P in a practice problem. b) What equation describes how much revenue the government makes after the taxes are

imposed? You will ultimately get a system of equations you can solve with conventional algebra. Remember the quadratic

formula? You?ll need that. As an approved cheat, you can use the website Wolfram Alpha to do that part for you.] 3. Go to the website http://users.nber.org/~taxsim/taxsim-calc9/ This site estimates income taxes based on income and other

characteristics. Scroll down to ?OR? Calculate liabilities?.? Click the button for ?Wage Income.? We?ve not discussed

income taxes in any detail, so we?ll keep it simple for now and just assume that all the income are wages. Compare the tax

liability for three individuals, named A, B and C in 2013. All are unmarried without children. A earns \$20,000 per year, B

earns \$90,000 per year, and C \$150,000 per year.

a.

b. Now suppose that A and C are a couple that share their bank accounts but are unmarried. They file their taxes

individually. What is the average tax rate for earnings for this couple? How about the same situation for B and C? c. What if the same couples were married? Change the simulation accordingly and calculate the marginal and average

tax rates. d. 4. What are the marginal tax rates (line 7) and total federal tax level (line 19) and average tax rates (line 19/earnings)? Comment on what you observed in parts b and c. Consider the Earned Income Tax Credit policy described in lecture. All else equal, what is the implication for labor supply

if:

a. The EITC supplement rate increases from (about) 30% to 60%? b. The phase-out rate increases?

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