HOW TO FAIRLY DISTRIBUTE THE FEDERAL TAX BURDEN

Problem Set I

1. Assume: S(‘P’) = 50 + P” D(P*) = 370 – 3P+
Sales tax of 20%
Calculate the equilibrium buyers’ and sellers’ price with no sales tax, and then with the 20%
tax assumed above.

2. Assume: S(‘P’) = 50 + 3P’ D(P*) = 370 – Pi”
Sales tax of 20%
Calculate the equilibrium buyers’ and sellers’ price with no sales tax, and then with the 20%
tax assumed above.

3. Explain how your answers for question 1 and 2 illustrate the principle that the less responsive
side of the market (with a smaller price coefficient) will pay more than half the total cost of
a sales tax.

4. Draw diagrams of questions 1 and 2 and explain how they illustrate your answer to question