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34.Effect of a tax on buyers and sellers

34 . Effect of a tax on buyers and sellers The following graph shows the daily market for shoes when the tax on sellers is set at $0 per pair. Suppose the government institutes a tax of $40.60 per pair, to be paid by the seller. (Hint: To see the impact of the tax, enter the value of the tax in the Tax on Sellers field and move the green line to the after-tax equilibrium by adjusting the value in the Quantity field. Then, enter zero in the Tax on Sellers field. You should see a tax wedge between the price buyers pay and the price sellers receive.) Use the graph input tool to help you answer the following questions. You will not be scored on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Graph Input Tool (? ) 200 Market for Shoes 180 I Quantity 100 Supply (Pairs of shoes) Demand Price 132.00 Supply Price 0.00 (Dollars per pair) ( Dollars per pair) Supply Shifter PRICE (Dollars per pair) $ 8 8 8 5 58 Demand Tax on Sellers 0.00 (Dollars per pair) 20 0 100 200 300 400 500 600 700 800 900 1000 QUANTITY (Pairs of shoes)8 Demand Tax on Sellers 0.00 PRICE (Doll (Dollars per pair) 8 40 100 200 300 400 500 600 700 800 900 1000 QUANTITY (Pairs of shoes) Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax. Quantity Price Buyers Pay Price Sellers Receive (Pairs of shoes) (Dollars per pair) ( Dollars per pair) Before Tax After Tax Using the data you entered in the previous table, calculate the tax burden that falls on buyers and sellers, respectively, and calculate the price elasticity of demand and supply throughout the relevant ranges using the midpoint method. Enter your results in the following table. Tax Burden (Dollars per pair) Elasticity Buyers Sellers The burden of the tax falls more heavily on the less * elastic side of the market.28 . Application: Elasticity and hotel rooms The following graph input tool shows the daily demand for hotel rooms at the Big Winner Hotel and Casino in Las Vegas, Nevada. To help the hotel management better understand the market, an economist identified three primary factors that affect the demand for rooms each night. These demand factors, along with the values corresponding to the initial demand curve, are shown in the following table and alongside the graph input tool. (Note: All values are hypothetical.) Demand Factor Initial Value Average Canadian household income $40,000 per year Round trip airfare from Vancouver (YVR) to Las Vegas (LAS) $100 per round trip Room rate at the Lucky Hotel and Casino, which is near the Big Winner $200 per night Use the graph input tool to help you answer the following questions. You will not be scored on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Graph Input Tool (?) Market for Big Winner's Hotel Rooms Price 150 (Dollars per room) Quantity 350 Demanded (Hotel rooms per night) PRICE (Dollars per room) Demand Factors -Demand Average Income 10 (Thousands of dollars) Airfare from YVR to 100 LAS (Dollars per round 0 50 100 150 200 250 300 350 400 450 500 trip) QUANTITY (Hotel rooms) Room Rate at Lucky 200 (Dollars per night)Graph Input Tool Market for Big Winner's Hotel Rooms Price 150 (Dollars per room) Quantity 350 Demanded (Hotel rooms per night) PRICE (Dollars per room) Demand Factors -Demand Average Income 10 (Thousands of dollars) Airfare from YVR to 100 LAS (Dollars per round 0 50 100 150 200 250 300 350 400 450 500 trip) QUANTITY (Hotel rooms) Room Rate at Lucky 200 (Dollars per night) For each of the following scenarios, begin by assuming that all demand factors are set to their original values and that Big Winner is charging $150 per room per night. If average household income increases by 25%, from $40,000 to $50,000 per year, the quantity of rooms demanded at the Big Winner falls from rooms per night to rooms per night. Therefore, the income elasticity of demand is negative , meaning that risesel rooms at the Big Winner at inferior good positive a normal good If the price of a room at the Lucky were to decrease by 20%, from $200 to $160, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Big Winnerfalls from rooms per night to rooms per night. Because the cross-price elasticity of demand is legalive , hotel rooms at the Big Winner and hotel rooms at the Lucky are complements positive substitutes Big Winner is debating decreasing the price of its rooms to $125 per night. Under the initial demand conditions, you can see that this would cause its total revenue to decrease . Decreasing the price will always have this effect on revenue when Big Winner is operating on the elastic portion of its demand curve. nelastic