Question

. Taxation and comparative statics with small changes:

a. Given that ??/?? represents the tax incidence on consumers in equation, (??/??= ?/(?−?))what is the expression for the tax incidence on firms in terms of η & ε. What does the sum of the tax incidence on consumers and firms equal? In no more than two sentences, explain why they must sum to this number.

b. Now consider another scenario, the imposition of a specific tax (?) that is paid directly to the

government by consumers rather than by firms as in part (a). Under such a tax, the equilibrium

condition is now: ?(?∗(?) + ?) = ?(?∗(?)). This condition sets a general demand function equal to a

general supply function, shows that the equilibrium price P* is an implicit function of ?, and makes

explicit that the amount now paid for the good by consumers with the tax is ?∗ + ?. Use this equilibrium

condition to find ??/??.

c. In part (a) P* represents the price consumers pay. What does P* represent in part (b)?

d. Should it be surprising that your answers to parts (a) and (b) represent the same tax incidence for firms?

Support your answer in no more than three sentences.

Answer 1

Answer: