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Economics 202 Cookbooks - Justcookbooks






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Phase 5 Economics I
Part I
The government decides to tax cookbooks because they feel that they encourage
overeating and can lead to health issues, such as obesity and heart disease. Answer the
What type of tax is this? Explain.
This is an indirect tax. This type of tax is used to modify consumption patterns. This
is a part of social engineering. This is an attempt by the government to influence popular
attitudes and social behaviours on a large scale. Tax on cookbooks has been imposed to
discourage obesity. This type of tax is also called sin tax because it has the objective of
reducing the sin of overeating. As mentioned below the proceeds of this tax can be used to
finance the cost of treating obesity or other health problems.
What happens to the supply of cookbooks?
When there is a tax paid on cookbooks the prices of cookbooks increases leading to a
decline in demand for cookbooks. The new equilibrium is at a point where the price is higher
than the earlier price of cookbooks but the equilibrium quantity is lower that the number of
cookbooks sold earlier. The suppliers now get a lower price for the cookbooks after they pay
the tax. The supply of cookbooks declines.
What happens to the equilibrium price?
The equilibrium price is higher than the current price but is less than the previous
price plus tax. There is an adjustment between the demand and supply. When the tax is first
added to the price there is a decline in demand. There is a slight downward adjustment in

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prices till a new equilibrium price is reached. This equilibrium price will be higher than the
original price but will be lower than the original price plus tax.
Who pays the tax at the end?
At the end the tax is paid in part by the buyers of the cookbooks and the suppliers of
cook books. After imposition of taxes the supply curve shifts to the left. The buyers pay a
higher price for the books and the suppliers receive a lower price after paying taxes. How
much tax is paid by the buyers and the suppliers of cookbooks depends on the elasticity of
demand and elasticity of supply for cookbooks.
Is this a good way to finance programs to improve health?
Even though the taxes raised from cookbook sales are hypothecated to healthcare
activities, this is not a good way to finance programs to improve health. There is a
deadweight loss due to taxation. This dead-weight loss occurs because now there are fewer
mutually beneficial exchanges between buyers and sellers. This loss occurs because of
foregone economic activity and is a loss that does not lead to an offsetting gain for the other
market participants. This tax will lead to a permanent decrease in consumer and producer
What other types of tax can the government use to increase revenues?
There are several other types of taxes that the government can use to increase
revenues. There are taxes on income which are called income tax, corporate tax, or capital
gains tax. The government can use taxes on payroll and social security contribution to
increase its revenues. The government can impose tax on property. These taxes can be
property tax, inheritance tax, or transfer tax. The government can impose taxes on goods and
services. These can be sales taxes, excises, and value added tax. There can be different types
of tariffs. Government can charge license fees or other types of taxes. The government can

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use non-tax methods also to raise revenues. For example, transfers to the public sector add to
the revenues of the government. The government provides several services and the fees
received for these can constitute revenues for the government. For example, the fees charged
to students at government owned universities add to the revenues of the government. Other
methods of raising revenues include receiving contributions from private individuals, by
printing money/coins, and by imposing penalties. The government can borrow money or can
confiscate wealth. Overall, there are several avenues available to the government for raising
revenues; it should avoid raising money for financing health projects by taxing cookbooks.
Part II becomes wildly successful in the United States, and you decide to
export overseas.
Does this reflect an absolute or a comparative advantage?
This reflects comparative advantage. USA has comparative advantage over other
countries if it is producing a service at lower opportunity costs. The cost that is sacrificed to
make another unit of that particular item is the opportunity cost. Now if
has become successful in the United States it means that it has been able to provide service at
lower marginal and opportunity cost over that by other companies. From the perspective of
United States, if the country is more efficient in producing and marketing cookbooks online it
should indulge in trade or export overseas. Comparative advantage stipulates that countries
should specialize in certain class of products for export, but import the rest even if the
country holds an absolute advantage in all products. If United States in general and in particular specializes in cookbooks it should export cookbooks to other
Name some issues that you will encounter as you become a multinational corporation

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