1. Economists have estimated the elasticity of demand for basic cable TV service at -0.51…

1. Economists have estimated the elasticity of demand for basic cable TV service at -0.51 and the elasticity of demand for direct broadcast satellite TV at -7.40. Your town wants to raise tax revenues from TV viewers and proposes taxes on both services. If the goal is to raise the revenue as efficiently as possible, what should the ratios of the cable tax to the satellite tax be? What assumptions underlie this calculation?
2. In 2002, Uncle Sam levied a tax of 3% on that part of a car’s price exceeding $40,000.
Discuss the efficiency, equity and administrability of this luxury car tax.
3. Peter the Great at one time taxed men’s beards (women, I presume where exempt!). He
thought beards were superfluous and useless. The tax was said to have been proportional
according to the length of beard and progressive according to the social position of its possessor. Evaluate Peter’s beard tax from the standpoint of optimal tax theory and from the standpoint of horizontal equity.
4. Suppose that Larry faces a marginal tax rate of 35%, and faces a 2% chance of being caught if he cheats on his taxes. Suppose the marginal penalty of tax evasion is 10I, where I is the amount of unreported income in thousands. How much income will Larry fail to report?
5. Indicate whether each of the following statements is true, false or uncertain, and explain why.
a) A proportional tax on all commodities including leisure is equivalent to a lump sum tax.
b) Efficiency is maximized when all commodities are taxed at the same rate.
c) Average cost pricing for a natural monopoly allows the enterprise to break even, but the
outcome is inefficient.
d) Tom’s workplace provides free access to a fitness room, Jerry’s does not. Horizontal equity requires that Tom be taxed on the value of having access to the fitness room.
Discuss market structures that are fundamentally different than the perfectly competitive market we have assumed to exist in most of our economic problem solving. It is important to compare and contrast these market types as real world analysis will require that you use the right set of assumptions before addressing any economic issues.

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  • A monopoly represents the opposite extreme of a perfectly competitive market. What underlying assumptions are different between the two types of markets?
  • We know from previous models that a perfectly competitive market maximizes total surplus. What does this mean? Why is there a “social cost” associated with monopolies? Explain.
  • Antitrust laws in the US exist to ensure that one firm cannot gain monopoly power. Should the government always intervene in the case that a firm becomes too large? Explain.
  • In a departure from using a partial equilibrium model economists sometimes use game theory to analyze oligopolistic markets. What characteristics of oligopoly make it necessary to use this type of approach?
  • Of the three market types (perfect competition, oligopoly and monopoly), which, in your opinion, is most commonly found in the real world? Give an example and explain.