State the Inverse Elasticity Rule and explain it using some graphs to show how a change...

State the Inverse Elasticity Rule and explain it using some graphs to show how a change in the price elasticity of supply impacts the size of the excess burden of a tax.

Expert Solution

We know that the inverse elasticity rule explains that the Ramsey result in an elasticity form. The rule is “the tax rates on goods inversely related to their elasticity of demand”. It is used to explain the tax policy to elasticity of demand. The incidence of tax ultimately relates to elasticity of supply and demand that is the percentage changes in prices and elasticity of supply and demand. Also the dead weight loss regarding taxation is expressed by elasticity of demand and supply.

Here Ramsey explains the impact of taxation by using price elasticity of supply using perfectly elastic supply. That is supplier will provide an infinite amount by given price. Here the more inelastic in demand the less the dead weight loss. Graphically,

In the first diagram shows perfectly elastic supply. Here the dead weight loss is higher because elastic demand. And also the revenue earned by tax is lower. In the second diagram the more the elasticity of demand the dead weight loss is lesser.

Rahul Sunny answered 1 year ago

The following question is about elasticity and taxation. a. Using graphs, explain how elasticity affects who...

The following question is about elasticity and taxation. a. Using graphs, explain how elasticity affects who bears a larger burden of a tax placed on the buyer. Be detailed in your answer. b. Given the two points below, calculate the elasticity when going from point A to point B. Why is this not equivalent to the elasticity from point B to point A? A: (1, 15) B: (3, 5)

3. (Chapter 3) Explain the followings and show them using graphs: A Demand Quantity Demanded Change...

3. (Chapter 3) Explain the followings and show them using graphs: A Demand Quantity Demanded Change in Demand (and list factors) Change in Quantity Demanded (and list factors) Does a change in demand also change quantity demanded? How about a change in quantity demanded? Will that change the demand? Explain! 5pts. 4. (Chapter 27) Use the attached National Income and Output Worksheet, and the national income data table on page 550 of your textbook (problem # 4) to compute the...

Using fully labeled graphs and words that clearly and fully explain these graphs show the impact...

Using fully labeled graphs and words that clearly and fully explain these graphs show the impact a tariff will have on U.S. consumers, U.S. producers, and the U.S. Treasury. Assume that before the tariff is imposed that U.S. consumers can buy goods at world prices (i.e. there are no restrictions on imports into the U.S.)

Using AD/AS model, explain and show using graphs how fiscal policy overshooting can cause consequences in...

Using AD/AS model, explain and show using graphs how fiscal policy overshooting can cause consequences in the economy.

Draw and explain the elasticity/TR graphs and why it is important for the government to understand...

Draw and explain the elasticity/TR graphs and why it is important for the government to understand elasticity before it raises a tax on specific product such as gasoline or tobacco.

Show using graphs how an increase in direct taxes would affect unemployment and inflation in the...

Show using graphs how an increase in direct taxes would affect unemployment and inflation in the Labor market (Wage Setting (WS) and Price Setting Curves (PS)) and the three-equation model (IS-PC-MR).

Show using graphs how a negative shock to productivity would affect unemployment and inflation in the...

Show using graphs how a negative shock to productivity would affect unemployment and inflation in the three-equation model (IS-PC-MR). Do you believe that negative shocks to productivity can exist? Explain.

Using the supply and demand for reserves graphs, show how the following events affects the federal...

Using the supply and demand for reserves graphs, show how the following events affects the federal fund rate, monetary base, non-borrowed reserves, borrowed reserves, the money multiplier, and the money supply. Assume the federal fund rate is equal to the discount rate. The Fed performs an open market sale.

Explain how a CVP graphs would change in a capitated environment. Evaluate which provider is in...

Explain how a CVP graphs would change in a capitated environment. Evaluate which provider is in the best position to grow its business.

9. Elasticity of Demand is designed to show sensitivity of the demand curve. Explain how it...

9. Elasticity of Demand is designed to show sensitivity of the demand curve. Explain how it works and why it can be used as a cross industry comparative tool. What does it mean if an elasticity is greater than 1?

Question