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. Taxation and comparative statics with small changes: a. Given that ??/?? represents the tax incidence...

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Basic Math

. Taxation and comparative statics with small changes:

a. Given that ??/?? represents the tax incidence on consumers inequation, (??/??= ?/(???))what is the expression for the taxincidence on firms in terms of ? & ?. What does the sum of thetax incidence on consumers and firms equal? In no more than twosentences, explain why they must sum to this number.

b. Now consider another scenario, the imposition of a specifictax (?) that is paid directly to the

government by consumers rather than by firms as in part (a).Under such a tax, the equilibrium

condition is now: ?(??(?) + ?) = ?(??(?)). This condition sets ageneral demand function equal to a

general supply function, shows that the equilibrium price P* isan implicit function of ?, and makes

explicit that the amount now paid for the good by consumers withthe tax is ?? + ?. Use this equilibrium

condition to find ??/??.

c. In part (a) P* represents the price consumers pay. What doesP* represent in part (b)?

d. Should it be surprising that your answers to parts (a) and(b) represent the same tax incidence for firms?

Support your answer in no more than three sentences.

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