Question

In an editorial entitled “Truth and Lies About Medicare,” the New York Times (August 19, 2012, p. SR10) discussed the financing of the Affordable Care Act of 2010, and stated: “And
a further chunk [ of revenue] will come from fees or taxes imposed on drug makers, device makers and insurers— fees that they can surely afford since expanded coverage for the uninsured will increase their markets and their revenues.”
a. Consider a firm that has a monopoly on the production of a particular medical device. A tax of 10 percent is levied on the sales of the firm. What is the editorial implicitly assuming about the incidence of this tax?
b. Assume that the firm has standard linear average revenue and marginal revenue curves, and produces with constant and positive marginal costs. Show the firm’s profits and the price paid by consumers of medical devices before and after the tax is imposed.
c. If you did part b correctly, you have shown that the editorial writer did not understand how to think about the incidence of a tax. Explain briefly the error.


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  • CreatedMarch 25, 2015
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