1. (20 pts) Consider the market for gin (a kind of hard liquor) in Paradiseland
ID: 1142569 • Letter: 1
Question
1. (20 pts) Consider the market for gin (a kind of hard liquor) in Paradiseland and in Stoicland. Suppose the supply of gin in both countries are the same and that both are represented by the supply curve in figure . Demand in Paradiseland and in Stoicland are described the corresponding curves in figure. Suppose the government in Paradiseland and the government in Stoicland both decide to impose a $10/pint of excise tax on the sellers. (a) (5 pts)Suppose both markets are in equilibrium. What is the price of gin in Paradiseland? What is the price of gin in Stoicland? Mark the equilibrium in Paradiseland and the equilibrium in Stoicland on Figure 1.
(b) Suppose the government in Paradiseland and the government in Stoickland both decide to charge a $1 excise tax on the buyers. That is, the buyers have to pay $10 to the government for every pint of gin they buy. After the tax policy goes into effect, will the equilibrium price of gin in Paradiseland be higher or lower than that in Stoicland, or will they be the same? Do the buyers in Paradiseland bear more or less or the same fraction of the tax burden? Answer this question by going through the following steps.
1. (5 pts)On the graph where you answered Q1a, draw the demand curve faced by sellers in both markets after the tax goes into effect.
2. (5 pts) On the graph where you answered Q1a, mark clearly the post-tax equilibrium in Paradiseland and the post-tax equilibrium in Stoicland.
3. (5 pts) How much more per pint do buyers in Paradiseland pay out of pocket after tax? How much less per pint do sellers in Paradiseland get after tax?
4. (5 pts) How much more per pint do buyers in Stoicland pay out of pocket after tax? How much less per pint do sellers in Stoicland get after tax?
10 8.5 7.5 Supply Curve in Paradiseland 5.5 3.5 2.5 1.5 0.5 o K 10 thousands of pints of gin Figure 1: Market Demand and Supply for GinExplanation / Answer
Before studying economics, you would have found it hard to explain why two cooks should
earn such different amounts. Now you notice that most of the workers at KFC are young—
possibly students trying to earn a few euros a month to help support them through college.
They do not have years of experience, and they have not spent years studying the art of
cooking. The chef across the street, however, has chosen to invest years of his life training and
acquiring specialized skills and, as a result, earns a much higher wage.
The well-heeled customers leaving that restaurant are likewise much richer than those around
you at KFC. You could probably eat for a week at KFC for the price of one meal at that
restaurant. Again, you used to be puzzled about why there are such disparities of income and
wealth in society—why some people can afford to pay €200 for one meal while others can
barely afford the prices at KFC. Your study of economics has revealed that there are many
causes: some people are rich because, like the skilled chef, they have abilities, education, and
experience that allow them to command high wages. Others are rich because of luck, such as
those born of wealthy parents.
Everything we have discussed in this section—the production process, pricing decisions,
purchase decisions, and the employment and career choices of firms and workers—are
examples of what we study in the part of economics called microeconomics.
Microeconomics is about the behavior of individuals and firms. It is also about how these
individuals and firms interact with each other through markets, as they do when KFC hires a
worker or when a customer buys a piece of fried chicken. When you sit in a fast-food
restaurant and look around you, you can see microeconomic decisions everywhere.
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