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Suppose the demand for good X can be represented by the following equation: Xd = 22 - (1/4)P.Furthermore,suppose that the demand for good Y can be represented by Yd = 50 - P.
(A)Find the elasticity of demand for both good X and good Y when the price is $10.
(B)Suppose that an ad valorem tax is placed on both goods.Good Y is taxed at a rate of 5%.To ensure that the inverse elasticity rule holds,what must be the rate at which good X is taxed?
Reminder: Elasticity at a given price is found using the formula ε = -(1/S)(P/X),where S is the slope of the demand curve,X is the quantity demanded,and P is the price.
Efficiency Losses
The reduction in economic efficiency due to imbalances or distortions in the market, often manifesting as excess or insufficient production and consumption.
Output Level
The quantity of goods or services produced by a firm or economy in a given period.
External Benefits
Positive effects of a product or service that are enjoyed by people other than those who directly use or consume the product or service.
Private Benefits
The direct advantages or gains accruing to an individual or organization from their economic actions, excluding wider societal impacts.
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