1. The market for tires is perfectly competitive, and the demand for tires is given by...

 

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1. The market for tires is perfectly competitive, and the demand for tires is given by the function D(p) = 8/p while the market supply of tires is given by the function S(p) = 2p (a) Determine the elasticity of demand and the elasticity of supply (you will get numbers here). (b) Using your answer from (a), what would you conclude about the economic incidence of a specific excise tax imposed on tires (i.e., what share of the tax will be borne by consumers and producers)? Does your answer depend upon which side of the market the tax is imposed on (the statutory incidence of the tax)? (c) Say now that the tax is not fully salient to consumers, and in particular the tax salience parameter is 0 = 0.5. Now what do you conclude about the economic incidence of the tax on consumers and producers? Does your answer depend upon which side of the market the tax is imposed on (the statutory incidence of the tax)? 1. The market for tires is perfectly competitive, and the demand for tires is given by the function D(p) = 8/p while the market supply of tires is given by the function S(p) = 2p (a) Determine the elasticity of demand and the elasticity of supply (you will get numbers here). (b) Using your answer from (a), what would you conclude about the economic incidence of a specific excise tax imposed on tires (i.e., what share of the tax will be borne by consumers and producers)? Does your answer depend upon which side of the market the tax is imposed on (the statutory incidence of the tax)? (c) Say now that the tax is not fully salient to consumers, and in particular the tax salience parameter is 0 = 0.5. Now what do you conclude about the economic incidence of the tax on consumers and producers? Does your answer depend upon which side of the market the tax is imposed on (the statutory incidence of the tax)?