On the island of Rockville, the equilibrium quantity of acres of land sold is currently 1,000, and the equilibrium price per acre is $500. Landowners have an elasticity of supply equal to 0. Consumers have an elasticity of demand greater than 1.
Using a correctly labeled graph of supply and demand for acres of land, show the equilibrium price ($500) and equilibrium quantity (1,000).
Now suppose that the government of Rockville imposes an excise tax of $20 per acre on the buyers of land.
Show the effects of the tax on your graph from part a, and indicate the new equilibrium price and equilibrium quantity.
Calculate the amount of tax revenue that is collected.
Calculate the amount of deadweight loss.
Who bears the burden of this tax? Explain.(9 points)
Rubric for FRQ (9 points)
1 point: P = $500 and Q = 1,000 shown on graph with correctly labeled axes and title
1 point: The demand curve is downward-sloping.
1 point: The supply curve is drawn as a vertical line.
1 point: A new demand curve is drawn and labeled below the original demand curve.
1 point: The new equilibrium price is $480 and the equilibrium quantity remains the same.
1 point: Tax revenue = $20 × 1,000 = $20,000
1 point: Deadweight loss = $0
1 point: Sellers bear the entire burden of the tax.
1 point: Because the supply curve is perfectly inelastic