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Demand supply and equilibrium wage

Part A:

The government decides to tax cookbooks because they feel that they encourage overeating and can lead to health issues, such as obesity and heart disease. Answer the following: in 600-800 words
- What type of tax is this? Explain.
- What happens to the supply of cookbooks?
- What happens to the equilibrium price?
- Who pays the tax at the end?
- Is this a good way to finance programs to improve health?
- What other types of tax can the government use to increase revenues?

Part B:

Justcookbooks.com becomes wildly successful in the United States, and you decide to export overseas. Answer the following:
- Does this reflect an absolute or a comparative advantage?
- Name 4 issues that you will encounter as you become a multinational corporation.
- What happens to your marginal utility as you buy your third luxury automobile? Why?

Part C

In the article entitled "The Economic Effects of Labor Unions Revisited," Vedder and Galloway attempt to prove statistically, using historical data, that labor unions do not have a good effect on the economy. Read the article, and explain the following microeconomic concepts that the authors discuss and how they are related to unions:
- Demand, supply, and equilibrium wage rates of labor
- Unemployment
- Deadweight welfare loss
- Elasticity
- Real GDP and economic growth
- Income per capita
- Population growth and aging
- Marginal costs, marginal revenues, and profits

The article focuses on harmful economic effects, but also mentions some positive aspects. What are they? Does moral hazard apply to unions? Why or why not?

Solution Preview

Part A:

- What type of tax is this? Explain.
This is an indirect tax. This type of tax is used to modify consumption patterns. This is a part of social engineering. This is an attempt by the government to influence popular attitudes and social behaviors on a large scale. Tax on cookbooks has been imposed to discourage obesity. This type of tax is also called sin tax because it has the objective of reducing the sin of overeating. As mentioned below the proceeds of this tax can be used to finance the cost of treating obesity or other health problems.

- What happens to the supply of cookbooks?
When there is a tax paid on cookbooks the prices of cookbooks increases leading to a decline in demand for cookbooks. The new equilibrium is at a point where the price is higher than the earlier price of cookbooks but the equilibrium quantity is lower that the number of cookbooks sold earlier. The suppliers now get a lower price for the cookbooks after they pay the tax. The supply of cookbooks declines.

- What happens to the equilibrium price?
The equilibrium price is higher than the current price but is less than the previous price plus tax. There is an adjustment between the demand and supply. When the tax is first added to the price there is a decline in demand. There is a slight downward adjustment in prices till a new equilibrium price is reached. This equilibrium price will be higher than the original price but will be lower than the original price plus tax.

- Who pays the tax at the end?
At the end the tax is paid in part by the buyers of the cookbooks and the suppliers of cook books. After imposition of taxes the supply curve shifts to the left. The buyers pay a higher price for the books and the suppliers receive a lower price after paying taxes. How much tax is paid by the buyers and the suppliers of cookbooks depends on the elasticity of demand and elasticity of supply for cookbooks.

- Is this a good way to finance programs to improve health?
Even though the taxes raised from cookbook sales are hypothecated to healthcare activities, this is not a good way to finance programs to improve health. There is a deadweight loss due to taxation. This dead-weight loss occurs because now there are fewer mutually beneficial exchanges between buyers and sellers. This loss occurs because of foregone economic activity and is a loss that does not lead to an offsetting gain for the other market participants. This tax will lead to a permanent decrease in consumer and producer surplus.

- What other types of tax can the government use to increase revenues?
There are several other types of taxes that the government can use to increase revenues. There are taxes on income which are called income tax, corporate tax, or capital gains tax. The government can use taxes on payroll and social security contribution to increase its revenues. The government can impose tax on property. These taxes can be property tax, inheritance tax, or transfer tax. The government can impose taxes on goods and services. These can be sales taxes, excises, and value added tax. There can be different types of tariffs. Government can charge license fees or other types of taxes. The government can use non-tax methods also to raise revenues. For ...

Solution Summary

This posting gives you a step-by-step explanation of consumption patterns and social engineering. The response also contains the sources used.

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