2. Taxes and Perfectly (In)elastic Supply The market demand for clothing is given by: D(p) = 500 5p (1) The City of Williamsburg decides to introduce a new sales tax on clothing of 10%. Note that this is a value tax (not a quantity tax). (a) Suppose that clothing supply is perfectly inelastic: whatever the price of clothing (b ) is, stores will always sell 400 units. What will the equilibrium price and quantity of clothing be before the new sales tax? Given the description of the supply from part (a), what will the equilibrium quantity be after the sales tax is introduced? What will be the new price paid by consumers and the new price received by sellers? What is the deadweight loss generated by the sales tax? Suppose that instead of clothing supply being perfectly inelastic, it is perfectly elastic: stores will sell any quantity of clothing but they will always sell it at a price of $20 per unit. Given this description of supply, what is the equilibrium price and quantity of clothing sold before the tax? Given the description of the supply from part (c), what will the equilibrium quantity be after the sales tax is introduced? What will be the new price paid by consumers and the new price received by sellers? What is the deadweight loss generated by the sales tax? Assume the government needs to raise 1" dollars of tax revenue. The government is deciding to place a tax on either food which has a fairly inelastic demand or on concert and movie tickets which have a fairly elastic demand. Given your answers to parts (a) through (d) of this question and your answers to Question 2, which of these two taxes should the government pursue? You should explain your answer with the help of graphs of the effects of the taxes in each market