Ch.16 - equilibrium

Question 1

What is the effects of a subsidy in a market with a horizontal supply curve? With vertical supply curve?

Answer 1

Entire subsidy gets passed to consumers if the supply is flat. Subsidy is totally received by the producers when the supply curve is vertical

Question 2

Suppose the demand curve is vertical while the supply curve slopes upward. If a tax is imposed in this market who ends up paying it ?

Answer 2

The consumer

Question 3

Suppose all consumers view red pencils and blue pencils as perfect substitutes. Suppose that the supply curve for red pencils is upward sloping. Let the price of red pencils and blue pencils e Pr and Pb. What would happen is the government put a tax only on red pencils?

Answer 3

Demand curve of red pencils is horizontal at the price of Pb, most they are willing to pay for a red pencil . Tax imposed on red pencils consumers will end up paying Pb for them so the entire amount of tax will end up being borne by the producers

Question 4

Suppose that the supply curve is vertical. What is the DWL of the tax in this market?

Answer 4

Zero. The same amount is supplied before and after : the suppliers are paying the entire amount of the tax and everything they pay goes to the government.