1. What happens to price and quantity for a firm when it is faced with a lump – sum tax/subsidy? Explain. Question 1

2. They do not change because a lump sum tax does not change MC. Therefore, the profit- maximizing point where MR=MC doesn’t change. Answer

3. What happens to price and quantity for a firm when it is faced with a per-unit tax? Explain. Question 2

4. The price will increase and the quantity will decrease. This tax will increase the MC, which causes the firm to charge a higher price and reduce the quantity produced because of the increased cost of each unit. Answer

5. In the market for B-52 bombers, assume the price elasticity of supply is more inelastic than the price elasticity of demand. If there was a sales tax on consumers of these bombers, who would have the higher tax incidence? Explain. Question 3

6. The producers would pay more of the tax burden since their elasticity is more inelastic. Whoever’s elasticity is more inelastic than the other, they will share most of the tax burden. Answer