Part 1 The Welfare Impact of a Tax

Let's suppose that a tax is being proposed newly proposed for the market for gasoline. You can assume this market is competitive. Suppose that someone states: "The tax is on the producers of gasoline and therefore will not impact consumers."

Explain why the above statement is not accurate. You must use the graph provided as a basis for your market in your explanation as well as the concepts of tax incidence, deadweight loss, consumer and producer surplus. Be sure to completely label the graph (there are some obvious pieces missing). Shift the appropriate curve, make sure your labels are complete, and denote on the graph the areas associated with welfare changes in a market that is taxed. You graph should show Consumer and Producer Surplus before and after the tax. You should label tax revenue and deadweight loss. Explain how the relative elasticity of demand and supply will impact tax incidence.

Part 2: Supply and Demand

Read the article provided in a PDF format for you in the module from the Wall Street Journal called:

"Remote Work Fuels Laptop Boom --- Computer makers, already hit by supply disruptions, can't keep up with the demand" Needleman, Sarah E; Tilley, Aaron . Wall Street Journal , Eastern edition; New York, N.Y. [New York, N.Y]19 Mar 2020: B.4.

In this article, the author describes changes in the laptop market that shifts both the demand and the supply curve. Assume that the laptop market can be modeled fairly well using the competitive supply and demand model. Answer the following questions:

1. What direction has the demand curve shifted? Why (associate it with a determinant of demand).
2. What direction has the supply curve shifted? Why (associate it with a determinant of supply).
3. Suppose the demand curve shifts by MORE THAN the supply curve. Using a supply and demand model, make a qualitative analysis of what will happen to the price and sale of laptops in a free market setting. Be sure to draw the supply and demand curve, label and initial equilibrium, shift the curves in the appropriate direction and label the new equilibrium. Compare the price and sales levels in words.

Part 3: Thinking Like an Economist

You will answer only ONE question. Choose either question A or question B. Be thorough in your answer and use the economic terminology we have learned about in your reading and videos.

1. What do economists mean when they say that people are rational? If economics is correct in its assumption that people are rational, why then would anyone choose to smoke cigarettes?