Question

Here's the situation:
Charlize Theron conquered the peaceful land of Rombus as the people in this land actually agreed with the Mirror that Kristen Stewart is prettier than Charlize. You are now the economic advisor for Charlize the Supreme Overlord of Rombus. All people of Rombus really really love eating chicken nuggets and the demand of chicken nuggets is highly inelastic. The supply of chicken nuggets is fairly elastic. Charlize hates chicken nuggets as they generally look like Kristen. The general public is angry about being conquered and Charlize wants to institute a policy to stop chicken nugget sales without angering the people. Charlize wants to implement either one of two grand ideas. Her first idea is to place a large tax on the sales of chicken nuggets to provide a disincentive for producers to sell chicken nuggets. Her second idea is to place a very low price ceiling on chicken nuggets. This price ceiling would force chicken nugget prices to be far lower than the current market clearing price for chicken nuggets. She believes implementing either policy will force chicken nugget producers out of industry and shift public anger regarding the reduction of chicken nuggets onto the producers and not her.

Please help me answer these questions!!:

(1) What is the initial incidence of the tax?

(2) Burden of the tax?

(3) The effect of a price ceiling on the market of chicken nuggets? and,

(4) whether there will be a shortage or surplus?

(5) The welfare impact of implementing these policies?

I APPRECIATE IF ANYONE CAN HELP ME!!

Answer 1

Answer 1) The initial incidence is also known as statutory incidence of tax. It is the tax burden on the person who is initially chosen by the government to pay the tax. In this initial incidence of tax is on producer. The reason is that Charlize Theron idea is to place a large tax on the sales of chicken nuggets to provide a disincentive for producers to sell chicken nuggets.

Answer B) Burden of tax is on the buyers of chicken nuggets not on the producers of chicken nuggets. The reason is that demand for chicken nugget is inelastic, which means increase or decrease in price is having no impact on the demand. Therefore, if tax is charged on buyers and price rises , even of that they will buy chicken nuggets. On the other hand, supply of chicken nuggets is fairly elastic means increase in price due to taxes can decrease the production.

Answer- C) The effect of price ceiling on the market of chicken nugget is that prices of chicken nugget will reduce as compared to the current prices and profits of producers will convert in to losses.

Answer D) There will be shortage of chicken nuggets due to price ceiling. Profits of producer will decrease. Second reason is that supply is elastic means decrease in profit will decrease thee supply.