Question

1. Say the demand curve for a good is linear, given by Q = a − b(1 + t), where the producer price of the good is fixed and equal to $1, and t is the existing tax rate.

(a) Determine an expression for the excess burden (EB) of the tax for this demand curve in terms of the demand parameters a and b and the tax rate t (express it as a positive amount). (5)

(b) Determine an expression for the marginal excess burden (dEB/dt) associated with an incremental increase in the tax rate t. (5)

(c) Determine an expression for the change in tax revenue associated with an incremental increase in the tax (dR/dt), identifying the mechanical and behavioural effects.(5)

(d) Determine an expression for the marginal excess burden per dollar of incremental revenue raised (dEB/dR). (5)

(e) Determine an expression for the Marginal Cost of Public Funds (MCF) for this demand curve. Again, the expression should be a simple function of the demand parameters a and b and the initial tax rate t. (5)

(f) Calculate the MCF when a = 10, b = 2, t = .5. Briefly, what does this mean (in words) and what are the implications for tax policy? (5)

Answer 1

nSWer:- l?near, gte, by .8-a-b(けt), wohere the Producer Price ef the. red Ps Pxed and eual to , andtte taa vate e bt c2

bt at at-bt-bt dles bt a-b-abt de bt Thus