Gallaway
ECO 515
Spring 2005
All homework should have a cover page indicating the student's name, class, and row number. All homework assignments should be typed. Math and graphs can be handwritten if done very neatly. You may work in groups. See the syllabus for relevant guidelines. You do not need to answer the red parts of the questions, but you should spend some time thinking about them.
(I suggest you cut and paste these questions into a Word document and then start from there.)
1. Explain the assumptions of the Harberger model. Use this Model to explain the economic incidence of each of these taxes: tL & tLm.
2. Imagine a Supply curve where P = 3 + 2Q and a Hicksian Demand curve where P = 27 - Q. (Note: You should remember that quantity is a function of price (not the other way around). I'm only using price as a dependent variable to make the math and graphs a bit easier for you.)
Find the equilibrium (set the equations equal to each other & solve for Q, then use Q to get P).
Graph these curves.
Assume the government imposes a per-unit tax = $3 on the sale of this good. What is the new equilibrium price & quantity? (Hint: does this tax affect the slope or the intercept of your supply curve?)
What is the new price & quantity?
Per unit, what is the economic incidence of the tax for consumers & producers? Why determines who pays more of the tax?
Calculate the total tax revenue collected.
Calculate the excess burden of this tax.
On the graph you drew previously, show the new supply curve, the tax revenue, the share of taxes paid by consumers & producers, and the excess burden.
3. Use an indifference curve diagram to show the excess burden of a tax on a commodity.
4. Give an intuitive explanation of how a tax causes deadweight loss.
5. Explain the similarities between the Ramsey Rule, the Corlett-Hague Rule and the Inverse Elasticity Rule.
6. Describe the income and substitution effects of a tax on (labor) income.
7. What is a VAT? Explain why, when using the invoice method, there might be better compliance (less cheating) with a VAT than there is with the US's income tax.