Question
1. (10 points) Consider the demand function Q=105-3p+4m, where p is price and m is money income. a) Calculate the income elasticity of demand. It
1. (10 points) Consider the demand function Q=105-3p+4m, where p is price and m is money income.
a) Calculate the income elasticity of demand. It will be a function of variables and constants. Do not make any substitutions for p or m.
b) Now, assume m=12. Calculate the price elasticity of demand at p=5.
c) Suppose the government implements a unit tax of $2.50 on this good. Find the change in consumer price after this tax increase (i.e., find p). Assume that =2.
d) Calculate the incidence of the unit tax on consumers. Who is hurt more by the tax? Producers or consumers? Why? Explain in words and appeal to elasticities.
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