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The Commonwealth of Pennsylvania is the monopoly retailer of wine in the state
The Commonwealth of Pennsylvania is the monopoly retailer of wine in the state. Suppose that Quaker Cabernet has no close substitutes and that the statewide inverse demand function for this wine is
c) New Jersey taxes wine sales. While the retailers pay the taxes on wine sales, by raising prices they may pass on some or all of these taxes to consumers. Identify the specific tax (tax per bottle sold) for which New Jersey's equilibrium market price and quantity equal the Pennsylvania monopoly price and quantity. Given the quantity tax, show that New Jersey's tax revenue equals Pennsylvania's profit.
New Jersey's specific tax is $2.5 and its revenue is $_____. Round your answers to two decimal places
Pennsylvania's profit is $_____. Round your answer to two decimal places
Expert Solution
The equilibrium price and quantity in Pennsylvania is $3.50 and 1500 respectively.
The equilibrium price and quantity in New Jersey is $2 and 3000 respectively.
Profit earned in Pennsylvania equals 3.50*1500 - 2*1500 = $2250
For New Jersey to impose a specific tax such that the equilibrium price and quantity are equal to the monopoly market in Pennsylvania, they need to produce a quantity of 1500 units and charge a price of $3.50. In a competitive market, 3000 bottles are supplied supplies at a price of $2. Since marginal cost is constant, the aggregate supply curve is horizontal at $2 which implies that a tax burden falls on the consumers only. Thus, the state can set the fixed per unit tax of $3.50 - $2 = $1.50. The tax revenue from a specific tax of $1.50 on 1500 goods is 1.5(1500) = 2250 which equals Pennsylvania's profit.
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