1.The 1990 tax on yachts and other luxury goods was shifted forward to
and backward to
. (Related to Application 5 on page 479.)
2. A tax paid in legal terms by producers will be partly shifted forward onto
and partly shifted backward onto
.
3. Arrow up or down: As the price elasticity of demand increases, the size of the price increase resulting from a tax
and the share of the tax borne by consumers
.
4. The demand for coffee is relatively inelastic. Therefore, we would expect
to pay a relatively large share of a tax on coffee.
5. The Employment and Wage Effects of a Luxury Boat Tax. Suppose the luxury boat industry initially employs 100 workers and produces 50 boats per month. Suppose a tax on luxury boats increases the equilibrium price from $300,000 to $320,000. The price elasticity of demand for luxury boats is 2.0. (Related to Application 5 on page 479.)
a. The luxury tax increases the equilibrium price of boats by
percent, so it decreases the quantity of boats demanded from 50 to
. If builders continue to employ 10 workers for each boat, the number of boat workers decreases from 100 to
.
b. Suppose the workers in the industry respond to the luxury boat tax by agreeing to take a wage cut that decreases the cost of producing boats by 10 percent. In addition, suppose firms pass on the savings in labor costs to boat consumers. The wage reduction decreases the price of boats by _________ percent and increases the quantity of boats demanded from _________ to _________. If builders continue to employ 10 workers for each boat, the number of boat workers is _________