More questions on the
effects of a sales tax.
1) The town of West Headland has many barbershops and they price
competitively. The demand for haircuts is given by
the equation Q=1200-20P. Nobody is willing to supply a haircut
for less than $5. The supply curve has the equation
Q=80P-400 for all P>$5
What is the equilibrium price for a haircut? What is the
equilibrium number of haircuts?
2) Suppose that the town imposes a $5 sales tax on
haircuts. The tax is collected from barbers. What is
the new equilibrium price that buyers must pay for a haircut? the new
How much revenue is raised?
3) It can be shown that total consumers' surplus (buyers'
profits) were $19,360 before the tax was imposed and $16,000
afterwards. It can also be shown that total profits of sellers
were $4840 before the tax was imposed and $4000 after the tax was
imposed. How much is the excess burden of the
tax? (For extra credit--Can you show that buyers and
sellers profits before and after were what is claimed here?)
3) As part of a city beautification program, the town government
decides that instead of taxing, they will subsidize
haircuts, by paying barbers $5 for every haircut that they give.
What is the new equilbirium price paid by buyers for a haircut?
the new equilibrium quantity? How much does the subsidy cost the
4) Total profits of buyers, with the subsidy can be shown
tobe $23,040. Total profits of sellers with
the subsidy can be shown to be $5760.
How much is the excess cost of the subsidy? (For extra
credit--Show that the total profits are as claimed here.)
Answers available here.