1. The Employment and Wage Effects of a Luxury Boat Tax. Suppose the luxury boat industry initially employs 1,000 workers and produces 100 boats per month. Suppose a tax on luxury boats increases the equilibrium price from $300,000 to $345,000. The price elasticity of demand for luxury boats is 2.0.

a. The luxury tax increases the equilibrium price of boats by_______ percent, so it decreases the quantity of boats demanded from 100 to_______. If builders continue to employ 10 workers for each boat, the number of boat workers decreases from 1,000 to______.

b. Suppose the workers in the industry respond to the luxury boat tax by agreeing to take a wage cut that decreases the cost of producing boats by 5 percent. In addition, suppose firms pass on the savings in labor costs to boat consumers. The wage reduction decreases the price of boats by_______ percent and increases the quantity of boats demanded from _______to _______. If builders continue to employ 10 workers for each boat, the number of boat workers is_______.

2. Cutting the Hotel Tax. Suppose your city initially has a $20-per-night tax on hotel rooms, paid in a legal sense by the hotel. Under the tax, the equilibrium price of hotel rooms is $80 per night.

a. Draw a supply-demand graph to show the effects of eliminating the tax.

b. How does the elimination of the tax affect the equilibrium price of hotel rooms?

c. How does the elimination of the tax affect the wages of hotel workers?

d. Is the change in the price greater than, less than, or equal to $20? Why?

3. Shifting a Housecleaning Tax. Consider a city where poor people clean the houses of rich people. Initially, housecleaning firms charge their customers $10 per hour, keep $1 per hour for administrative costs, and pay their workers $9 per hour. Like many luxury goods, the demand for housecleaning service is very elastic. Housecleaning workers are not very responsive to changes in the wage.

a. Use supply and demand curves to show the initial equilibrium in the market for cleaning services (price = $10 per hour; quantity = 1,000 hours of cleaning per week), and label the equilibrium as point a.

b. Suppose the city imposes a tax of $3 per hour on cleaning services, and one-third of the tax is shifted forward to consumers. Use your graph to show the effects of the tax on the housecleaning market. Label the new equilibrium as point b. What is the new price?

c. Is it reasonable that only one-third of the tax is shifted forward? Explain.

d. Suppose that firms continue to keep $1 per hour for administrative costs. Predict the new wage.

e. Who bears the bulk of the housecleaning tax, wealthy households or poor ones?

4. Effects of a Higher Fish Tax. In Figure, suppose the fish tax is $2 per pound of fish instead of $1. Draw a graph to show the effect of the $2 tax. In the new equilibrium, the price is $ _______, the quantity is _______, and the deadweight loss from the tax is $ _______.

5. Tax Eliminates a Market? Use a supply and demand graph to show a situation in which a tax on no. 3 pencils reduces the equilibrium quantity of no. 3 pencils to zero.
6. What do the results of the study of the African mobile-phone market imply about the long-run price elasticity of demand for mobile services?

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