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Tax Incidence, Competitive Markets, and Luxury Taxes

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1. What are some of the unique characteristics of the competitive market?

2. Discuss the role of elasticity in tax incidence and burden.

3.Competitive Markets Concepts. Indicate whether each of the following statements is true or false, and explain why.

A. In long-run equilibrium, every firm in a perfectly competitive industry earns zero profit.
B. Perfect competition exists in a market when all firms are price takers as opposed to price makers.
C. In competitive markets, P > MC at the profit-maximizing output level.
D. Downward-sloping industry demand curves characterize perfectly competitive markets.
E. A firm might show accounting profits in a competitive market but be suffering economic losses.

4. In 1990, Congress adopted a luxury tax to be paid by buyers of high-price cars, yachts, private airplanes, and jewelry. Proponents see the levy as an effective means of taxing the rich. Critics point out that those bearing the hardship of a tax may or may not be the same as those who pay the tax (the point of tax incidence). Explain how the elasticities of supply and demand in competitive markets can have direct implications for the ability of buyers and sellers to shift the burden of taxes imposed upon them. Also explain how elasticity information has implications for the amount of social welfare lost due to the deadweight loss of taxation.

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Questions on tax incidence, competitive markets, and luxury taxes.

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Atomicity -An atomistic market is one in which there are a large number of small producers and consumers on a given market, each so small that its actions have no significant impact on others. Firms are price takers, meaning that the market sets the price that they must choose.
Goods and services are perfect substitutes- that is, there is no product differentiation.
Perfect and complete information -All firms and consumers know the prices set by all firms (see perfect information and complete information).
Equal access -All firms have access to production technologies, and resources (including information) are perfectly mobile.
Free entry- Any firm may enter or exit the market as it wishes (see barriers to entry).

2. Elasticity is the slope of the demand or supply curve and describes ...

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