Question

Suppose that the market for rutabagas (in case you don’t know, it is a root vegetable that’s also known as Swedish Turnip) is competitive. The demand for rutabagas is Q = 2, 000 − 100P and the supply of rutabagas is Q = −100 + 200P.

(a) (10 points) Suppose that Governor Sloop imposes a $2 per unit tax to be paid by consumers. Who bears the statutory incidence of the $2 per unit tax? Who bears the economic incidence of this tax? [A graph can be helpful but not required.]

(b) (5 points) What is the deadweight loss of the tax?

(c) (10 points) Suppose now that Governor instead imposes that the $2 unit tax is to be paid by the stores directly. What will happen to the “sticker price” (i.e. price paid by consumers) on rutabagas? Verify that the consumers’ tax burden would stay the unchanged.

Answer 1