1. Unit 2: Demand, Supply, and Consumer Choice
Copyright
ACDC Leadership 2015

2. Trade and Taxes
Copyright
ACDC Leadership 2015

3. Practice Questions
1. If the cross price elasticity coefficient of goods A and B is -5 and the income elasticity of good A is 2, which of the following is true?
A decrease in the price of good A will decrease the demand for good B
An increase in income will decrease the demand for good A
Goods A and B are substitutes
Good B is an inferior good
An increase in the price of A will decrease the demand for good B
Answer E 3
Copyright
ACDC Leadership 2015 3

4. Review $22 20 18 16 14 Calculate the area of: P Consumer Surplus
Producer Surplus
Total Surplus P
$22 20 18 16 14 S CS
CS= $40
PS= $20
Total= $60 PS D 20 Q
Copyright
ACDC Leadership 2015

5. Limits on Trade
World Price- Countries can buy products at their own domestic price or they can buy the products at a cheaper world price
Tariff- Tax on imports that increases the world price
Quota- a limit on number of imports.
Purpose of tariffs and quotas:
To protect domestic producers from a cheaper world price.
To prevent domestic unemployment
Copyright
ACDC Leadership 2015

6. International Trade and Quotas
Identify the following:
CS with no trade
PS with no trade
Amount we import at world price (PW)
PS if we trade at world price (PW)
CS if we trade at world price (PW)
If government tariff leads to a world price of PT, how much is imported and what is the CS and PS?
1.H
2.TLI
3.Q5-Q1
4. T
5.HIJKLMNRS
6. Import Q4 – Q2, PS is LT, CS is HIJK
This graphs show the domestic supply and demand for grain. The letters represent area.
Copyright
ACDC Leadership 2015

9. 6. CS gets smaller and PS gets bigger
1.H
2.TLI
3.HIJKLMNRS
4.T
5.Q5-Q1
6. CS gets smaller and PS gets bigger
Copyright
ACDC Leadership 2015

10. Excise Tax = A per unit tax on producers
Excise Taxes
Excise Tax = A per unit tax on producers
For every unit made, the producer must pay $
NOT a Lump Sum (one time only)Tax
The goal is for them to make less of the goods that the government deems dangerous or unwanted.
Ex:
Cigarettes “sin tax”
Alcohol “sin tax”
Environmentally Unsafe Products
Etc. 10
Copyright
ACDC Leadership 2015

11. Government sets a $2 per unit tax on Cigarettes
Excise Taxes
Supply Schedule
Government sets a $2 per unit tax on Cigarettes P P Qs $5
140 $4
120 $3
100 $2 80 $1 60 S $5 4 3 2 1 D Q

12. Government sets a $2 per unit tax on Cigarettes
Excise Taxes
Supply Schedule
Government sets a $2 per unit tax on Cigarettes P P Qs
$5 $7
140
$4 $6
120
$3 $5
100
$2 $4 80
$1 $3 60 S $5 4 3 2 1 D Q

13. Tax is the vertical distance between supply curves
Excise Taxes
STAX
Supply Schedule P P Qs
$5 $7
140
$4 $6
120
$3 $5
100
$2 $4 80
$1 $3 60 S $5 4 3 2 1
Tax is the vertical distance between supply curves D Q

14. Identify the following:
Excise Taxes
STAX
Identify the following:
Price before tax
Price consumers pay after tax
Price producers get after tax
Total tax revenue for the government before tax
Total tax revenue for the government after tax P S $5 4 3 2 1
1.$3
2.$4
3.$2
4.$0
5.$160 D Q

15. Tax Practice CS Before Tax PS Before Tax CS After Tax PS After Tax
Tax Revenue for Government
Deadweight Loss assuming society wants Q2 produced
Amount of tax revenue producers pay
1.ABCD
2.HFEG
3.A
4.G
5.BCHF
6.DE
7.HF

16. 2012 Question 18 D 16
Copyright
ACDC Leadership 2015

17. 2012 Question 19 D 17
Copyright
ACDC Leadership 2015

18. A

19. Excise Tax P
$14 12 11 8 S D 10 12 Q
Copyright
ACDC Leadership 2015

20. Excise Tax 12 P Stax S $14 11 Pc 8 Pp D 12 10 Q Calculate Tax Per Unit
Total Tax Revenue
Amount of Tax paid by consumers
Amount of Tax paid by producers
Total Expenditures
Total Revenue for firms P
Stax
$14 12 11 8 S Pc Pp D 10 12 Q

21. Excise Tax

22. Tax Incidence Who ends up paying for an excise tax?22
Copyright
ACDC Leadership 2015

23. EXCISE TAX ON MILK $2 TAX on Producers 5 P $10 8 6 4 2 S D 8 10 Q
Demand- Inelastic
Supply- Unitary
$10 8 6 5 4 2 S
$2 TAX on Producers D 8 10 Q

24. EXCISE TAX ON MILK $2 TAX on Producers 5 P S1 $10 8 7 6 4 2 S D 9 10 Q
$6.50 =Pconsumers
Amount Consumers Pay
$2 TAX on Producers
$4.50 = Pproducers
Amount Producers Pay D 9 10 Q
Quantity Doesn’t Fall VERY Much!!! 24
Copyright
ACDC Leadership 2015

25. EXCISE TAX ON BEEF $2 TAX on Producers 5 P $10 8 6 4 2 S D 8 10 Q
Demand- Elastic
Supply- Unitary
$10 8 6 5 4 2 S
$2 TAX on Producers D 8 10 Q

26. EXCISE TAX ON BEEF $2 TAX on Producers 5 P S1 $10 8 S 6 4 2 Pc Pp D 10
DWL? Pp D 7 10 Q
Quantity Falls A lot!!! 26
Copyright
ACDC Leadership 2015

27. EXCISE TAX 5 P S1 $10 8 7 6 4 2 S D 20 30 Q Pconsumers = $7
CS After
Pconsumers = $7
Tax per Unit?
Total Tax Revenue?
Tax paid by consumers?
Tax paid by producers?
Total spending?
Revenue for businesses?
Pproducers = $4 D 20 30 Q 27
Copyright
ACDC Leadership 2015

28. EXCISE TAX 5 P S1 $10 8 7 6 4 2 S D 20 30 Q Pconsumers = $7
CS After
Pconsumers = $7
Tax per Unit = $3
Total Tax Revenue = $60
Tax Paid by Consumers = $40
Tax Paid by Producers = $20
Total Spending = $140
Revenue for Businesses=$80
Pproducers = $4 D 20 30 Q 28
Copyright
ACDC Leadership 2015

29. Excise Tax
WHAT QUESTIONS
COULD WE ASK YOU??

30. Tax Incidence (Who pays?)ST S ST S ST S ST S ST S D D D D D
Perfectly
Inelastic
Relatively
Inelastic
Unit
Elastic
Relatively
Elastic
Perfectly
Elastic
Tax burden paid entirely by
consumers
Tax burden mostly on consumers
Tax burden shared by consumers and producers
Tax burden mostly on producers
Tax burden paid entirely by producers
Copyright
ACDC Leadership 2015

31. 2008 Audit Exam
18.B