Question

In this chapter we showed how the "consumer sur- plus" that people receive from being able to consume a good at its current price is given by the area below the demand curve and above that price, In this prob- lem we look at the relationship between consumer sur- 3.9. plus and the price elasticity of demand: a. Show graphically that the loss in consumer surplus from a given increase in price is smaller for an elas tic demand curvethan for an inelastic demand curve (assuming that price and quantity are the same on both curves before the price increase) b. Suppose that the price increase described in part a came about because of the imposition of a tax per unit on purchases of these goods. Would the amount of tax revenue collected be greater with the elastic demand curve or with theinelastic demand curve? Explain your result both graphically and intuitively. c. The "excess burden" of a tax is defined as the loss in consumer surplus from the imposition of the tax less the tax revenue actually collected, Is the excess burden of the tax described in part b larger with the elastic demand curve or with the inelastic demand curve? Explain your answer both graphically and intuitively. d. Suppose the government wanted to choose between two taxes that raised the same amount of revenue Should it tax the good with an elastic demand curve or the one with the inelastic demand curve? lain.

Answer 1

2- -theve ave o -types 약 demand unws D&D' -9The unve D Ủndicale Gelate demand and the e D hdica elase demard the matd to P And thom elashc demand, he. As -the area PPe greale than avea ppAc n elabhic demand than in elasthc de mand. Consamex suu rease y PPAC increase ใ bagld btHo increase Then tho

price . And t.% the trt Yale. hemarke uoith in elatic demand. asthe inpositi 시 예-tax t increae-the pricebyt, and Quontity remoun Same. undev helahc demand t e come This k the reve uecolkdfom the martel oth nelashc damand wve -) T)-He market uith elastic demand, as fecple Cosu Suoiteh to smo ctfor selles . the vevenue witbeIP- tkoれ tas