Taxes on the garden-gnome industry Taxes on the garden-gnome industry In the pre

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Taxes on the garden-gnome industry

Taxes on the garden-gnome industry In the previous problem, we studied the effects of a cost-saving invention. For this problem, we suppose that there was no such invention but that a tax was introduced. Suppose that on January 1, 2003, the government surprised the garden-gnome industry by introducing a tax on the production of garden gnomes. For every garden gnome produced, the manufacturer must pay a $1 tax. The announcement came early enough in the day so that there was time for gnome producers to change their orders of gnome molds for 2004. But the gnome molds available to be used in 2003 are those that had been ordered a year previously. Gnome makers had signed contracts promising to pay $1,000 for each gnome mold that they ordered, and they couldn't back out of these promises. Thus, in the short run, during the year 2003, the number of gnome molds is stuck at 28 Recall that the demand function facing the garden-gnome industry has been D(p) 60.000-5, 000p, where D(p) is the total number of garden gnomes sold per year and p is the price. With a gnome mold, you can make 500 gnomes per year. For every gnome that you make, you also have to use a total of $7 worth of plaster and labor. The total amounts of plaster and labor used are variable in the short run. If you want to produce only 100 gnomes a year with a gnome mold, you spend only $700 a year on plaster and labor, and so on a. On the graph below, use blue points (circle symbol) to plot the short-run industry supply curve for garden gnomes that applies in the year 2003, after the new tax is introduced. Line segments will automatically connect the points. Use an orange line (square symbols) to represent the demand curve for garden gnomes PRICE (Dollars 20 18 16 14 12 10 24 6 810 12 14 16 1820

Explanation / Answer

Ans b - Short run equilibrium total output of garden gnomes = 14000. Short run equilibrium price of garden gnomes is $9.20.

Ans c - Marginal cost of producing a garden gnome including tax is $8. Therefore, all garden gnomes are used to capacity in 2003.

Ans d - Total output of garden gnomes in 2003 is 14000. The price of garden gnomes id $9.20. Rate of return Deardwarf's cousin Zwerg make on his investment in garden gnome mold $1000 paid a year ago is -40%.

Ans e - Zwerg should be willing to pay $545.45 for Munchkin's new mold.

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