6. Consider 2 markets, pharmaceutical drugs and computers. Demand for pharmaceutical drugs is inelastic while the...

6. Consider 2 markets, pharmaceutical drugs and computers. Demand for pharmaceutical drugs is inelastic while the demand for computers is elastic.

a. (5) Draw and label market equilibrium for both markets. P Q Pharmaceutical Drugs P Q Computers

b. (5) Now suppose that the government were to place a tax in both markets. Which market has a larger dead weight loss from taxes?

c. (4) Which market generates a larger tax revenue?

d. (6) Given your answers to b. and c., is it more efficient to tax pharmaceutical drugs or computers? It is more equitable to tax pharmaceutic drugs or computers? Balancing the concepts of equity and 6 efficiency, which market would you tax and why? (Note: for the last part there is no right or wrong market to tax. I am looking for an argument that is based on the concepts of equity and efficiency. )

Solutions

Expert Solution

a) Demand of computers is elastic while demand of drugs is inelastic

b) If tax is imposed on both markets which raise price for consumers and reduce price received by producers. Deadweight loss in elastic market is area of portion C + D while deadweight loss in inelastic market is area of portion G + H.

We can see that deadweight loss in elastic market is more than inelastic market.

c) Tax revenue in elastic market is area of portion A + B while tax revenue in inelastic market is area of portion E + F. Tax revenue is more in ielastic market. nelastic market than in

d) Imposing tax on drugs is more efficient as the deadweight loss is less in inelastic market. Imposing tax on any of the market is inequitable distribution because elastic market pose more tax on producers while inelastic market pose more tax on inelastic market.

Rahul Sunny answered 1 year ago

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