Pokhara University || Fall 2016 || Introductory Microeconomics || BBA\BCIS

Very Short Answer Questions

Attempt all the questions.

10×2

The answers to the above 10 questions

Descriptive Answer Questions

Attempt any six questions.

6×10

is P=120-5Q

a)     Compute TR, TC and profit up to output level 10 units.

b)     Derive MR and MC functions.

c)     Determine the profit-maximizing output using the MC-MR approach.

18.

Case Analysis

Read the situation given below and answer the questions that follow.

In 1990, congress adopted a new luxury tax on items such as yachts, private aeroplanes, furs, jewellery, and expensive cars. The goal of the tax was to raise revenue from those who could most easily afford to pay. Because, only the rich could afford to buy such extravagances, taxing luxurious seemed a logical way of taxing the rich.

Yet, when the forces of supply and demand took over, the outcome was quite different from the one congress intended. Consider, for example, the market for yachts. The demand for yachts is quite elastic. A millionaire can easily not buy a yacht; she can use the money to buy a bigger house, take a European vacation, or leave a larger bequest to her heirs. By contrast, the supply of yachts is relatively inelastic, at least in the short run. Yacht factories are not easily converted to alternative uses, and workers who build yachts are not eager to change careers in response to changing market conditions.

Our analysis makes a clear prediction in this case. With elastic demand and inelastic supply, the burden of a tax falls largely on the suppliers. That is, a tax on yachts places a burden largely on the firms and workers who build yachts because they end up getting a significantly lower price for their product. The workers, however, are not wealthy. Thus the burden of a luxury tax falls more on the middle class than on the rich.

The mistaken assumptions about the incidence of luxury tax quickly became apparent after the tax went into effect. Suppliers of luxuries made their congressional representatives well aware of the economic hardship they experienced, and congress repealed most of the luxury tax in 1993.

Questions:

a)     What do you mean by inelastic demand? Why is a supply of yacht relatively inelastic in the short run?

b)     With elastic demand and inelastic supply, the burden of tax largely falls on suppliers, why?

c)     Why does the government impose a heavy tax on luxurious goods? Give some cases of Nepal.

d)     Why does congress repeal most of the luxury tax in 1993?

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