0. A tax is when a government takes money as part of a transaction. With gas taxes, for example, the seller of gasoline must pay 18.4 cents per gallon to the federal government. The tax then means the price buyers pay will be greater than the price sellers receive.

   A subsidy is the opposite of a tax; this is when a government puts in money as part of a transaction. Subsidies are common, although people are perhaps less aware of subsidies than they are of taxes. Subsidies have the opposite effect of taxes; a subsidy means the price buyers pay will be less than the price sellers receive.

1. On February 9, 2007, Utah Governor Jon M. Huntsman Jr. signed House Bill 148, which created a statewide school voucher program. A school voucher is a subsidy for private education, and Utah’s plan would allow any parent to receive a voucher for up to $3000 per kid to use

   towards tuition for private K-12 education. That is, if you live in Utah and want to send your kid to a private school, the state will pay up to $3000 of the tuition. If the tuition is $4,000 and you get a $3000 voucher, then the out-of-pocket cost for a parent is only $1,000.

   On March 1, 2007, opponents of the new law began a petition drive to put a referendum over the new law on the November ballot. After 92,000 signatures were collected in just 45 days, a heated election campaign ensued, with huge campaign funds flowing in from national organizations on both the pro- and anti-voucher sides. In November 2007, 62.1% of Utah’s voters cast ballots against the measure, and the law did not take effect. There is currently no subsidy program for private education in the state of Utah.

   This homework problem is designed to examine what would have happened had the law taken effect.

2. (a) Suppose the demand curve for private elementary school education in a mid-sized metropolitan area is given by

   Qd = 21 − P,
   where Qd is the number of students enrolled in thousands and P is tuition in thousands

   of dollars.

   Suppose there is a large number of small private elementary schools that supply education. However, expanding a school is costly. Even if a school decides to expand its capacity, it takes at least two years for the school to hire teachers and add classrooms. As a result, the short-run (that is, over the next two years) supply curve for private elementary school education is

   Qs = 15.
   Given these demand and supply curves, compute the market equilibrium price and quantity.

3. Compute the dollar value of consumer surplus at this equilibrium price and quantity.

Answer rating: 100% (QA)

Given these demand and supply curves compute the market equilibrium price and quantity ANS WER In equilibrium the quantity supplied must equal the qua... View the full answer