The people of "Thneed-Ville" wise-up to the ecologically destructive practice of cutting down Truffula trees to make thneeds. They levy a per-thneed tax of $1 on the supplier for each thneed sold (so t=1).

a) Draw the new post-tax supply curve. Why has the tax changed the supply curve in this way?

*Show linear curves, though the question uses constant elasticity assumption which would require some curvature. This is just to keep thing simple.

b) Suppose that thneed demand has a constant elasticity of -1, and thneed supply has a constant elasticity of 2. What is the change in the ultimate price consumers pay and the price suppliers receive? Show your calculations

c) Act like the Once-ler and ignore the environmental benefits. Estimate the deadweight loss due to the tax. From the name you can tell that the deadweight loss is a bad thing. Briefly explain what it represents.

d) Act like the Once-ler and ignore the environmental benefits. Suppose the initial price was $10 and the initial quantity of thneeds was 1,000. Calculate the change in the number of thneeds sold.

e) Suppose there is a neighboring town names "Sneed-ville", which is easy to get to and doesn't care about the environment (ie doesn't levy a tax). This estimation of the elasticities analysis was done at a local level. How would the elasticity of demand change if you were considering a federal tax that applied to all cities?