Answer the following questions regarding taxes. a. Suppose the demand for insulin pumps is QD =...

Answer the following questions regarding taxes.

a. Suppose the demand for insulin pumps is QD = 2,000 and the supply of insulin pumps is QS = 0.5 P – 1,000. What is the price that sellers receive per pump? Suppose the government imposes a tax of $400 per pump on sellers. What after-tax price per pump do sellers receive?

b. In the market for organic fruit, the elasticity of supply is 0.75 and the elasticity of demand is –1.25. If there is a tax of $2 per unit on organic fruit, what share of the tax is paid by buyers and what share is paid by sellers?

Solutions

Expert Solution

Qd=Qs

2000=0.5P-1000

3000 = 0.5P

P = 6000

P	Qd	Qs	Qs1
0	2000	-1000	-1200
1000	2000	-500	-700
2000	2000	0	-200
3000	2000	500	300
4000	2000	1000	800
5000	2000	1500	1300
6000	2000	2000	1800
7000	2000	2500	2300

As the demand is inelastic the suppliers receive 6400 after tax and consumers bear the $400

Tax burden on consumer = Es/(Ed+Es) = 0.75/(1.25+0.75) = 37.5 percent = 2*0.375 = $ 0.75

Tax burden on producer = Ed/(Ed+Es) = -1.25/(-1.25+0.75) = 62.5 percent = 2*0.625 = $1.25

Rahul Sunny answered 1 year ago

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