Suppose the market for grass seed can be expressed as Demand: QD = 100 - 2p Supply: QS = 3p Price elasticity of supply is constant at 1. If the demand curve is changed to Q = 10 - .2p, price elasticity of demand at any given price is the same as before. Yet, the incidence of a tax falling on consumers will be higher. Why?
What will be an ideal response?
With the same vertical intercept, the steeper demand curve results in the equilibrium price being lower than with the old demand curve. At the lower price, demand is relatively less elastic than with the original curve. Since the incidence of a specific tax on consumers is n/(n - e), where n is the price elasticity of supply and e is the price elasticity of demand, therefore when e increases (less elastic demand), the incidence on consumers will be higher.
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An externality refers to the idea that
A) explicit costs differ from implicit costs. B) decision-makers do not internalize all the costs. C) we cannot do anything that does not affect other people. D) private and internal costs differ.
Suppose the market price of zinc doubles. Which of the following scenarios is most likely?
A) The demand for zinc miners will increase, raising the market wage rate. B) The demand for zinc miners will decrease, reducing the market wage rate. C) The demand for zinc will increase, raising the market price further. D) The demand for zinc miners will decrease, reducing the market price back to its original price.