Primary school is mandatory in many countries, and school supplies thus have a fairly inelastic demand, which we will represent with the function
$D(p) = \frac{82000.00}{\sqrt{p}}$. We will assume that the supply of school supplies is perfectly competitive with a constant price of $5.50 for typical supplies.
Part 1 (0.5 point)
In many states, all goods are subject to a statewide sales tax. Suppose the sales tax is 6%. Find the equilibrium prices and quantity of school supplies. All answers should be given to two decimal places.
Buyer's price: $
Seller's price: $
Quantity:
Part 2 (0.5 point)
A governor wants to support education and provide some tax relief, so she proposes a tax holiday on school supplies for one weekend before the beginning of a new school year.
How much could current parents of school-age children potentially save from not having to pay sales tax on their school supplies?
(Factor in only parents already in the market.) $
Retailers are accustomed to a steady volume of parents buying school supplies in the weeks leading up to the start of school. With the tax holiday, however, many parents wait until the tax-free weekend to buy their supplies. Realizing that congestion may lead to long lines, some entrepreneurial college economics students offer to wait in line for stressed-out parents. What is the maximum total revenue the economics students stand to earn from waiting in line? $
If the economics students earn the maximum revenue, what was the net effect of the tax holiday?
Choose one:
A. It increased costs for parents by more than the benefits, lowered government revenues, and provided revenue for the college students equal to less than the lost revenue.
B. It increased costs for parents by less than the benefits, lowered government revenues, and provided revenue for the college students equal to more than the lost government revenue.
C. It increased costs for parents by exactly as much as the benefits, lowered government revenues, and provided revenue for the college students equal to the lost government revenue.
