You have been asked to advise a city council on a policy decision. They are considering...

   

Transcribed Image Text:

You have been asked to advise a city council on a policy decision. They are considering hosting a regional symphony and paying for the cost with tax revenues. The cost of the symphony is $6,000, and the funds would come from taxes on the sales of two goods: pickles and Champagne. Demand for pickles is given by Dp = 10,000 - 1000p, and supply for pickles is perfectly elastic at pp = 5. Demand for Champagne is given by D = 1,000 - 20p, and supply for glasses of Champagne is perfectly elastic at pc = 10. i) On the plots below, draw the supply and demand curves for the two goods. ii) Find the equilibrium quantities (qp, qc), prices (pp. pč). Calculate Producer Surplus and Consumer Surplus in the two markets (CS, PS, CS, PSC). iii) Under the following sales tax schemes, find the equilibrium quantities, prices, government revenue from each good, and total deadweight losses: a. $2 tax per pickle, $0 tax per glass of Champagne b. $0 tax per pickle, $10 tax per glass of Champagne c. $0.50 per pickle, $5.50 tax per glass of Champagne iv) Which of the tax schemes from part iii) has the least market distortion (i.e., smallest total deadweight loss)? v) Assume that all welfare weights are equal to 1 and that the value of the symphony is collectively worth $X to the people of the city. Use your answer from part iv) to write down an equation that must be true for the symphony to be worth funding. Now suppose no one in town consumes both pickles and Champagne: everyone is either a pickle consumer or a Champagne consumer, and suppose we have different welfare weights on the two types of consumers. vi) How much do pickle consumers suffer from each of the tax plans in section iii)? vii) How much do Champagne consumers suffer from each of the tax plans in section iii)? viii) Pickle consumers are generally less wealthy than Champagne consumers. Set the welfare weight of Champagne consumers to 1. What would the welfare weight on pickle consumers have to be for the city council to prefer tax b) from section iii) to tax c) from section iii)? 12 10 1k 2k 3k Market for Pickles 4k 5k 6k 7k 8k 9k 10k 60 50 40 30 20 10 Market for Champagne 100 200 300 400 500 600 700 800 900 1000 You have been asked to advise a city council on a policy decision. They are considering hosting a regional symphony and paying for the cost with tax revenues. The cost of the symphony is $6,000, and the funds would come from taxes on the sales of two goods: pickles and Champagne. Demand for pickles is given by Dp = 10,000 - 1000p, and supply for pickles is perfectly elastic at pp = 5. Demand for Champagne is given by D = 1,000 - 20p, and supply for glasses of Champagne is perfectly elastic at pc = 10. i) On the plots below, draw the supply and demand curves for the two goods. ii) Find the equilibrium quantities (qp, qc), prices (pp. pč). Calculate Producer Surplus and Consumer Surplus in the two markets (CS, PS, CS, PSC). iii) Under the following sales tax schemes, find the equilibrium quantities, prices, government revenue from each good, and total deadweight losses: a. $2 tax per pickle, $0 tax per glass of Champagne b. $0 tax per pickle, $10 tax per glass of Champagne c. $0.50 per pickle, $5.50 tax per glass of Champagne iv) Which of the tax schemes from part iii) has the least market distortion (i.e., smallest total deadweight loss)? v) Assume that all welfare weights are equal to 1 and that the value of the symphony is collectively worth $X to the people of the city. Use your answer from part iv) to write down an equation that must be true for the symphony to be worth funding. Now suppose no one in town consumes both pickles and Champagne: everyone is either a pickle consumer or a Champagne consumer, and suppose we have different welfare weights on the two types of consumers. vi) How much do pickle consumers suffer from each of the tax plans in section iii)? vii) How much do Champagne consumers suffer from each of the tax plans in section iii)? viii) Pickle consumers are generally less wealthy than Champagne consumers. Set the welfare weight of Champagne consumers to 1. What would the welfare weight on pickle consumers have to be for the city council to prefer tax b) from section iii) to tax c) from section iii)? 12 10 1k 2k 3k Market for Pickles 4k 5k 6k 7k 8k 9k 10k 60 50 40 30 20 10 Market for Champagne 100 200 300 400 500 600 700 800 900 1000

Answer rating: 100% (QA)

Okay here are the steps to solve this multipart question i ... View the full answer