1. The price elasticity of demand for wine is estimated to be -1 at all possible quantities. Currently, 200 million gallons of wine are sold per year and the price averages $6 per bottle.
- What is the excess burden associated with a tax of 10% on wine?
- What is the excess burden associated with a tax of 20% on wine?
- Using your answers in a. and b., what is the relationship between the tax rate and the excess burdens?
- Under what circumstances can a doubling of the tax on wine actually improve efficiency? (you will need to remember course material from before the midterm).
2.Rosen/Gayer, p. 370, #1 see the file attached