Question

1. Imagine that you work for the central bureaucracy and you need to raise revenue. You want to use a per-unit tax on some good. There are two possible goods. The current equilibrium price and quantity are the same for both goods. However, for good A,both the supply and demand are more elastic than for good B. The tax will be $1/unit regardless of which good you choose to tax. Which good will give you more revenue? Which one will be more efficient? Show this with two graphs. (You do NOT need to show the incidence on buyers and sellers to answer this question. These graphs should be pretty simple.....)

2. Country X has 100 units of labor. In country X it takes 10 units of labor to produce an airplane and 5 units of labor to produce a unit (whatever it is....) of coffee beans. Country Y has 200 units of labor. In country Y it takes 10 units of labor to produce an airplane and it takes 2 units of labor to produce a unit of coffee. Who has a comparative advantage in airplanes? Draw the PPF for these two countries combined. Label the slopes and intercepts.

Answer 1

1.Draw two simple graphs of supply and demand with one having a relatively steep slope compared to the other one.

The steep graph represents the inelastic good.

B will give you more revenue since demand for that good is less price sensitive as compared to A.Sift the demand down by an equal amount and notice the distortion between the two graphs.

2.The ppf curve of X and Y:-

Put airplanes on the X axis and beans on the Y axis.

X:-

Connect 10 airplanes on X axis to 20 beans on Y axis.This is your PPF.

Y:-

Connect 20 airplanes on X axis to 100 beans on Y axis. This is your PPF.

Now combine the graphs.

Country X has a comparative advantage in the case of airplanes.