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Consider the market for rubber bands.a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use the tools of consumer surplus and producer surplus in your answer.b. If this market has very inelastic supply and very elastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Contrast your answer with your answer to part (a).
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this question. We're comparing two different situations. One where we have elastic supply and an elastic demand graft here, and one where we have an elastic supply and elastic demand draft here. So we want to impose a identical tax to these two markets and see how it affects consumer produces surplus in either case. So to create an identical tax, I just want to draw a vertical line approximately the same length on both of these graphs here. So I considered those approximately equal, at least for our purposes. So in the usual way, let's draw the prices faced by the consumer and producer, respectively, after imposing these taxes and let's label all the usual regions. This is the consumer surplus that will be left with after the tax. The government revenue on the consumer side received from attacks and some Doug weight loss. This is thie new produces surplus, the producers government tax revenue and this tiny triangle here that you can barely see is that we lost on the producer side. Let's compare that over here to the second case. Where are new producer Our new consumer surpluses represented by region a here. Government revenue from consumers generated by this rectangle be here and then this little tryingto Here's dead weight loss on the consumer side. And here we have our produces surplus after the tax government revenue on the producer's side and don't get lost on the pure society. So what we see is the difference here is that when we have, if you ask six supply and an elastic demand, let's compare what the consumers lose here. Well, originally they had ABC, but they're losing this gigantic rectangular region B as well as this larger trying you'LL see. So it appears by visual inspection that the consumer surplus decreases by maur than the produces surplus when we have an elastic demand in the U. S. To supply in the alternative situation where we have an elastic supply, an elastic demand. Originally, the consumers had ABC is their consumer surplus and produces an X y Z. But after imposing the government tax, it appears a producer's surplus is decreasing by more than the consumer surplus. So we know in the first case that when demand is mohr an elastic compared to supply, it appears that the producers will bear a higher share of the tax burden on producers, the less sensitive to price shocks. So they take more of the burden and then in the opposite scenario, produces a very moral burden, as they're the ones who are less sensitive to price shocks.
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