This is from my SAT Practice Questions BOOK. I want the answers so i can study them. thank you

4) Summarize the theoretical economic effects as

Describe the "Supply and Demand Relationships", including:

a. Why does an excise tax shift the supply curve and why upward?

b. Compare and explain the different impact on equilibrium price, quantity and the expected revenue changes (aka spending) to the industry under the different assumptions of demand elasticity

5) Now back to the empirical estimates and results:

a. What type of supply and demand elasticities (i.e., very elastic, inelastic, etc.) do the authors suggest from the empirical evidence of this market?

b. Is more of the tax cost passed to the consumers or borne by the firms under these assumptions?

c. Summarize the 3 possible scenarios on Profits, Output & Jobs in the US Medical Device Industry

Figure I. Potential Effect of a Tax on the Medical Devices Market Price P E. p* Supply" Demand" Q, Q > Quantity Source: CRS. Notes: Q is quantity, P is price, and E is the equilibrium price and quantity point. Original values are marked with an asterisk. A t subscript indicates price and quantity after the tax. The following subsections discuss the evidence supporting a highly clastic supply curve and an inelastic demand curve. Supply Responses to Price The medical device market has not previously been subject to an excise tax, thus there are no previous studies that indicate how the firms in the industry react to a tax. Nevertheless, there is reason to believe that the supply curve for this industry is infinitely elastic or close to it in the long run, and therefore that the tax is passed forward into the price. There are several reasons to support this view. First, as discussed earlier, much of the market, producing ordinary items such as needles and catheters, is described as competitive by the S&P analysis." In the S&P report, which focuses on large publicly traded firms, there are 37 manufacturers of medical devices along with 1 1 additional firms that produce supplies, along with two other large firms that have a division producing these goods. IRS tax return data show over 9,000 firms producing medical supplies and "Phillip Seligman, Industry Surveys: Healthcare Products & Supplies, S&P Capital 1Q, August 2013. Congressional Research Service 13company, tends to have a downward sloping marginal cost curve). A constant marginal cost assumes that firms have constant returns to scale and can produce additional amounts at the same cost. A rising marginal cost curve could also be considered, but it would not change the outcome for passing through the tax. The firm's profits (II): (5) I1 = P(Q)Q(1-1)-cQ To totally differentiate this equation and obtain the maximum profit, given t: (6) (PdQ + QdP)(1-t) - cdQ =0 This analysis considers a constant clasticity of demand function: (7) Q=AP_Ed For this function, (8) dQ/Q = -Ed (dP/P), or (9) dP = -(1/Ed)(P/Q)dQ. Substitute (9) into (6) and solve for P: (10) P = (Ed/(Ed-1))c/(1-() Compare (10) with and without the tax and the result is that Pr, the price after the tax is compared to the price without the tax, or: (11) P-P = (P/(1-(). rises by 2.35%" Because the tax is an ad valorem tax, the price rises by slightly more than P;; for a 2.3% tax, it Textbooks sometimes teach that a monopolist passes on half of the cost of an excise tax to the consumer and the same analysis would apply to a monopolistic competitor facing a downward sloping demand curve. This outcome, however, is an artifact of a linear demand curve which must intersect the x and y axis. To solve for the effect with a linear demand curve, the demand function is: (12) P = a-bQ This function can be solved by substituting (16) directly into the profit function: (13) II = (a-bQ)*(Q(1-t)) -cQ Differentiating (13), holding t constant, and finding the profit maximum, (14) (a-2bQ)(1-t)=c Solving (14) for Q and substituting it into (12) leads to the price equation: (15) P = =/2 +c/(2(1-()) With an ad valorem tax the pass through is equal to (1/2) (t(1-t))*c which passes through 1% of the portion of tax on c and thus less than half of the total tax appears in price.likely to be smaller as more individuals become covered through health insurance since individuals with health insurance do not face the full price. (Note, however, that the share would vary by procedure. A higher share of the cost of medical devices would likely occur for a hip replacement than for hospitalization for an infection.) Potential Effects on Output, Jobs, and Innovation This section of the report analyzes the economic effects of the medical device tax under three sets of assumptions that provide sensitivity to elasticity estimates." First, the analysis considers both no pass through and full pass through of the price, which are the measures that define the possible values of the supply curve elasticity (zero and infinity). If there is no pass through of the tax, there is no effect on consumers and no change in quantity. As noted above the evidence does not appear to support this case. If some of the tax is absorbed by the firm, the firm must have above normal profits, and these profits above the amount required to attract capital will fall In the case of full pass through, which appears more likely and where the demand response is relevant, two elasticity assumptions are considered. Both assume that final consumer demand is - 0.2. In one, inputs into health services are assumed to be in fixed proportions, the factor substitution elasticity is zero and the demand elasticity is very small, -0.008. In the second case, the factor substitution elasticity is set at the same level as the consumer demand elasticity for health services, -0.2, inelastic and below the economy-wide average, but above the fixed input assumption. This assumption produces a demand elasticity of -0.2 and the demand elasticity set at -0.2. When this last assumption is made, the share of the cost attributable to medical devices is not relevant since both clasticities are the same. The demand may be more clastic for these technologically advanced products which may be a larger part of cost in the lower elasticity case, but there is somewhat more of a possibility that all of the price will not be passed forward, which has overall offsetting effects. The range of effects from these cases is shown in Table 3. With no pass through of the tax in price, there are no effects on output, employment or innovation, since the tax presumably falls on profits. (As noted above, this outcome does not appear realistic.) The effect on profit as a percentage of revenue is reduced because only half of devices are taxed and because of savings in income taxes due to deductions for excise taxes paid. With pass through and inputs fixed and an overall 0.008 demand elasticity the factor substitution elasticity set at zero, the percentage reduction in output for U.S. medical device firms is estimated at 1/100 of 1%."With the factor substitution and overall demand elasticity set at -0.2, the effect is estimated at two-tenths of 1%. The results in Table 3 when the tax is passed on in profit indicate a range of effects on jobs of almost zero to about 1,200