Essentials of Economics 7th Edition Gregory Mankiw Solutions Manual Full Chapter PDF

Essentials of Economics 7th Edition
Gregory Mankiw Solutions Manual

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Chapter 8
8
of Taxation
APPLICATION: THE COSTS OF

TAXATION
WHAT’S NEW IN THE SEVENTH EDITION:
A new In the News box on “The Tax Debate” has been added.
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
➢ how taxes reduce consumer and producer surplus.
➢ the meaning and causes of the deadweight loss from a tax.
➢ why some taxes have larger deadweight losses than others.
➢ how tax revenue and deadweight loss vary with the size of a tax.
CONTEXT AND PURPOSE:
Chapter 8 is the second chapter in a three-chapter sequence dealing with welfare economics. In the
previous section on supply and demand, Chapter 6 introduced taxes and demonstrated how a tax affects
the price and quantity sold in a market. Chapter 6 also described the factors that determine how the
burden of the tax is divided between the buyers and sellers in a market. Chapter 7 developed welfare
economics—the study of how the allocation of resources affects economic well-being. Chapter 8
combines the lessons learned in Chapters 6 and 7 and addresses the effects of taxation on welfare.
Chapter 9 will address the effects of trade restrictions on welfare.
The purpose of Chapter 8 is to apply the lessons learned about welfare economics in Chapter 7 to the
issue of taxation that was addressed in Chapter 6. Students will learn that the cost of a tax to buyers and
sellers in a market exceeds the revenue collected by the government. Students will also learn about the
factors that determine the degree by which the cost of a tax exceeds the revenue collected by the
government.
144
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Chapter 8 /Application: The Costs of Taxation ❖ 145
KEY POINTS:
• A tax on a good reduces the welfare of buyers and sellers of the good, and the reduction in
consumer and producer surplus usually exceeds the revenue raised by the government. The fall in
total surplus—the sum of consumer surplus, producer surplus, and tax revenue—is called the
deadweight loss of the tax.
• Taxes have deadweight losses because they cause buyers to consume less and sellers to produce
less, and these changes in behavior shrink the size of the market below the level that maximizes total
surplus. Because the elasticities of supply and demand measure how much market participants
respond to market conditions, larger elasticities imply larger deadweight losses.
• As a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. Because a tax
reduces the size of a market, however, tax revenue does not continually increase. It first rises with
the size of a tax, but if the tax gets large enough, tax revenue starts to fall.
CHAPTER OUTLINE:
I. The Deadweight Loss of Taxation
A. Remember that it does not matter who a tax is levied on; buyers and sellers will likely share in
the burden of the tax.
B. If there is a tax on a product, the price that a buyer pays will be greater than the price the seller
receives. Thus, there is a tax wedge between the two prices and the quantity sold will be smaller
if there was no tax.
Figure 1
146 ❖ Chapter 8 /Application: The Costs of Taxation
C. How a Tax Affects Market Participants
1. We can measure the effects of a tax on consumers by examining the change in consumer
surplus. Similarly, we can measure the effects of the tax on producers by looking at the
change in producer surplus.
2. However, there is a third party that is affected by the tax—the government, which gets total
tax revenue of T × Q. If the tax revenue is used to provide goods and services to the public,
then the benefit from the tax revenue must not be ignored.
If you spent enough time covering consumer and producer surplus in Chapter 7,
students should have an easy time with this concept.
Figure 2
3. Welfare without a Tax
Figure 3
a. Consumer surplus is equal to: A + B + C.
b. Producer surplus is equal to: D + E + F.
c. Total surplus is equal to: A + B + C + D + E + F.
4. Welfare with a Tax
a. Consumer surplus is equal to: A.
b. Producer surplus is equal to: F.
c. Tax revenue is equal to: B + D.
d. Total surplus is equal to: A + B + D + F.
5. Changes in Welfare
a. Consumer surplus changes by: –(B + C).
b. Producer surplus changes by: –(D + E).
c. Tax revenue changes by: +(B + D).
d. Total surplus changes by: –(C + E).
6. Definition of deadweight loss: the fall in total surplus that results from a market
distortion, such as a tax.
D. Deadweight Losses and the Gains from Trade
Figure 4
1. Taxes cause deadweight losses because they prevent buyers and sellers from benefiting from
trade.
2. This occurs because the quantity of output declines; trades that would be beneficial to both
the buyer and seller will not take place because of the tax.
Show the students that the nature of this deadweight loss stems from the reduction
in the quantity of the output exchanged. Stress the idea that goods that are not
produced, consumed, or taxed do not generate benefits for anyone.
3. The deadweight loss is equal to areas C and E (the drop in total surplus).
4. Note that output levels between the equilibrium quantity without the tax and the quantity
with the tax will not be produced, yet the value of these units to consumers (represented by
the demand curve) is larger than the cost of these units to producers (represented by the
supply curve).
II. The Determinants of the Deadweight Loss
Figure 5
A. The price elasticities of supply and demand will determine the size of the deadweight loss that
occurs from a tax.
1. Given a stable demand curve, the deadweight loss is larger when supply is relatively elastic.
2. Given a stable supply curve, the deadweight loss is larger when demand is relatively elastic.
B. Case Study: The Deadweight Loss Debate
1. Social Security tax and federal income tax are taxes on labor earnings. A labor tax places a
tax wedge between the wage the firm pays and the wage that workers receive.
2. There is considerable debate among economists concerning the size of the deadweight loss
from this wage tax.
3. The size of the deadweight loss depends on the elasticity of labor supply and demand, and
there is disagreement about the magnitude of the elasticity of supply.
a. Economists who argue that labor taxes do not greatly distort market outcomes believe
that labor supply is fairly inelastic.
b. Economists who argue that labor taxes lead to large deadweight losses believe that labor
supply is more elastic.
Activity 1—Labor Taxes
Type: In-class discussion

Topics: Deadweight loss, taxation
Materials needed: None
Time: 10 minutes
Class limitations: Works in any size class
Purpose
Most students have not spent a great deal of time considering the effects of taxation on labor
supply. This in-class exercise gives them the opportunity to consider the effects of proposed
tax rates on their own willingness to supply labor.
Instructions
Ask students to assume that they are full-time workers earning $10 per hour, $80 per day,
$400 per week, $20,000 per year.
Ask them if they would quit their jobs or keep working if the tax rate was 10%, 20%, 30%,
… (up to 100%).
Keep a tally as they show hands indicating that they are leaving the labor force.
Ask students what they think the “best” tax rate is.
Points for Discussion

Many students have no idea that current marginal tax rates are greater than 30% for many
taxpayers.
Students will likely say that a tax rate of zero would be best, but remind them that there
would be no roads, libraries, parks, or national defense without at least some revenue raised
by the government.
III. Deadweight Loss and Tax Revenue as Taxes Vary
Figure 6
A. As taxes increase, the deadweight loss from the tax increases.
B. In fact, as taxes increase, the deadweight loss rises more quickly than the size of the tax.
1. The deadweight loss is the area of a triangle and the area of a triangle depends on the
square of its size.
2. If we double the size of a tax, the base and height of the triangle both double so the area of
the triangle (the deadweight loss) rises by a factor of four.
C. As the tax increases, the level of tax revenue will eventually fall.
D. Case Study: The Laffer Curve and Supply-Side Economics
1. The relationship between the size of a tax and the level of tax revenues is called a Laffer
curve.
2. Supply-side economists in the 1980s used the Laffer curve to support their belief that a drop
in tax rates could lead to an increase in tax revenue for the government.
3. Economists continue to debate Laffer’s argument.
a. Many believe that the 1980s refuted Laffer’s theory.
b. Others believe that the events of the 1980s tell a more favorable supply-side story.
c. Some economists believe that, while an overall cut in taxes normally decreases revenue,
some taxpayers may find themselves on the wrong side of the Laffer curve.
ALTERNATIVE CLASSROOM EXAMPLE:

Draw a graph showing the demand and supply of paper clips. (Draw each curve as a 45-
degree line so that buyers and sellers will share any tax equally.) Mark the equilibrium price
as $0.50 (per box) and the equilibrium quantity as 1,000 boxes. Show students the areas of
producer and consumer surplus.
Impose a $0.20 tax on each box. Assume that sellers are required to “pay” the tax to the
government. Show students that:
▪ the price buyers pay will rise to $0.60.

▪ the price sellers receive will fall to $0.40.
▪ the quantity of paper clips purchased will fall (assume to 800 units).
▪ tax revenue would be equal to $160 ($0.20  800).
Have students calculate the area of deadweight loss. (You may have to remind students how
to calculate the area of a triangle.)
Show students that as the tax increases (to $0.40, $0.60, and $0.80), tax revenue rises and
then falls, and the deadweight loss increases.
E. In the News: The Tax Debate
1. Recently, policymakers have debated the effects of increasing the tax rate, particularly on
higher-income taxpayers.
2. These two opinion pieces from The Wall Street Journal present both sides of the issue.
Activity 2—Tax Alternatives
Type: In-class assignment

Topics: Taxes and deadweight loss
Materials needed: None
Time: 20 minutes
Class limitations: Works in any size class
Purpose
The market impact of taxes can be a new concept to many students. This exercise helps them
think about the effects of taxes on different goods. Taxes that may be appealing for equity
reasons can be distortionary from a market perspective.
Instructions
Tell the class, “The state has decided to increase funding for public education. They are
considering four alternative taxes to finance these expenditures. All four taxes would raise the
same amount of revenue.” List these options on the board:
1. A sales tax on food.
2. A tax on families with school-age children.
3. A property tax on vacation homes.
4. A sales tax on jewelry.
Ask the students to answer the following questions. Give them time to write an answer, and
then discuss their answers before moving to the next question:
A. Taxes change incentives. How might individuals change their behavior because of
each of these taxes?
B. Rank these taxes from smallest deadweight loss to largest deadweight loss. Explain.
C. Is deadweight loss the only thing to consider when designing a tax system?
Common Answers and Points for Discussion

A. Taxes change incentives. How might individuals change their behavior because of
each of these taxes?
1. A sales tax on food: At the margin, some consumers will purchase less food.
Overall food purchases will not decrease substantially because the tax will be
spread over a large number of consumers and demand is relatively inelastic.
2. A tax on families with school-age children: No families would put their children up
for adoption to avoid taxes. A large tax could have implications for family
planning; couples may choose not to have children, or to have fewer children,
over time. A more realistic concern would be relocation to other states by mobile
families to avoid the tax.
3. A property tax on vacation homes: This tax would be concentrated on fewer
households. A large tax would discourage people from buying vacation homes.
Developers would build fewer vacation homes in the long run. In many areas,
people could choose an out-of-state vacation home to avoid the tax.
4. A sales tax on jewelry: This tax would also be relatively concentrated. People
would buy less jewelry, or they would buy jewelry in other states with lower
taxes.
B. Rank these taxes from smallest deadweight loss to largest deadweight loss.
Lowest deadweight loss—tax on children, very inelastic
Then—tax on food. Demand is inelastic; supply is elastic.
Third—tax on vacation homes Demand is elastic; short-run supply is inelastic.
Most deadweight loss—tax on jewelryDemand is elastic; supply is elastic.
C. Is deadweight loss the only thing to consider when designing a tax system?
No. This can generate a lively discussion. There are a variety of equity or fairness
concerns. The taxes on children and on food would be regressive. Each of the taxes
would tax certain households at much higher rates than other households with similar
incomes.
SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. Figure 1 shows the supply and demand curves for cookies, with equilibrium quantity Q1 and
equilibrium price P1. When the government imposes a tax on cookies, the price to buyers
rises to PB, the price received by sellers declines to PS, and the equilibrium quantity falls to
Q2. The deadweight loss is the triangular area below the demand curve and above the supply
curve between quantities Q1 and Q2. The deadweight loss shows the fall in total surplus that
results from the tax.
Figure 1
2. The deadweight loss of a tax is greater the greater is the elasticity of demand. Therefore, a
tax on beer would have a larger deadweight loss than a tax on milk because the demand for
beer is more elastic than the demand for milk.
3. If the government doubles the tax on gasoline, the revenue from the gasoline tax could rise
or fall depending on whether the size of the tax is on the upward or downward sloping
portion of the Laffer curve. However, if the government doubles the tax on gasoline, you can
be sure that the deadweight loss of the tax rises because deadweight loss always rises as the
tax rate rises.
Questions for Review
1. When the sale of a good is taxed, both consumer surplus and producer surplus decline. The
decline in consumer surplus and producer surplus exceeds the amount of government
revenue that is raised, so society's total surplus declines. The tax distorts the incentives of
both buyers and sellers, so resources are allocated inefficiently.
2. Figure 2 illustrates the deadweight loss and tax revenue from a tax on the sale of a good.
Without a tax, the equilibrium quantity would be Q1, the equilibrium price would be P1,
consumer surplus would be A + B + C, and producer surplus would be D + E + F. The
imposition of a tax places a wedge between the price buyers pay, PB, and the price sellers
receive, PS, where PB = PS + tax. The quantity sold declines to Q2. Now consumer surplus is
A, producer surplus is F, and government revenue is B + D. The deadweight loss of the tax is
C+E, because that area is lost due to the decline in quantity from Q1 to Q2.
Figure 2
3. The greater the elasticities of demand and supply, the greater the deadweight loss of a tax.
Because elasticity measures the responsiveness of buyers and sellers to a change in price,
higher elasticity means the tax induces a greater reduction in quantity, and therefore, a
greater distortion to the market.
4. Experts disagree about whether labor taxes have small or large deadweight losses because
they have different views about the elasticity of labor supply. Some believe that labor supply
is inelastic, so a tax on labor has a small deadweight loss. But others think that workers can
adjust their hours worked in various ways, so labor supply is elastic, and thus a tax on labor
has a large deadweight loss.
5. The deadweight loss of a tax rises more than proportionally as the tax rises. Tax revenue,
however, may increase initially as a tax rises, but as the tax rises further, revenue eventually
declines.
Quick Check Multiple Choice

1. a
2. b
3. c
4. a
5. b
6. a
Problems and Applications
1. a. Figure 3 illustrates the market for pizza. The equilibrium price is P1, the equilibrium
quantity is Q1, consumer surplus is area A + B + C, and producer surplus is area D + E +
F. There is no deadweight loss, as all the potential gains from trade are realized; total
surplus is the entire area between the demand and supply curves: A + B + C + D + E +
F.
Figure 3
b. With a $1 tax on each pizza sold, the price paid by buyers, PB, is now higher than the
price received by sellers, PS, where PB = PS + $1. The quantity declines to Q2, consumer
surplus is area A, producer surplus is area F, government revenue is area B + D, and
deadweight loss is area C + E. Consumer surplus declines by B + C, producer surplus
declines by D + E, government revenue increases by B + D, and deadweight loss
increases by C + E.
c. If the tax were removed and consumers and producers voluntarily transferred B + D to
the government to make up for the lost tax revenue, then everyone would be better off
than without the tax. The equilibrium quantity would be Q1, as in the case without the
tax, and the equilibrium price would be P1. Consumer surplus would be A + C, because
consumers get surplus of A + B + C, then voluntarily transfer B to the government.
Producer surplus would be E + F, because producers get surplus of D + E + F, then

voluntarily transfer D to the government. Both consumers and producers are better off
than the case when the tax was imposed. If consumers and producers gave a little bit
more than B + D to the government, then all three parties, including the government,
would be better off. This illustrates the inefficiency of taxation.
2. a. The statement, "A tax that has no deadweight loss cannot raise any revenue for the
government," is incorrect. An example is the case of a tax when either supply or demand
is perfectly inelastic. The tax has neither an effect on quantity nor any deadweight loss,
but it does raise revenue.
b. The statement, "A tax that raises no revenue for the government cannot have any
deadweight loss," is incorrect. An example is the case of a 100% tax imposed on sellers.
With a 100% tax on their sales of the good, sellers will not supply any of the good, so
the tax will raise no revenue. Yet the tax has a large deadweight loss, because it reduces
the quantity sold to zero.
3. a. With very elastic supply and very inelastic demand, the burden of the tax on rubber
bands will be borne largely by buyers. As Figure 4 shows, consumer surplus declines
considerably, by area A + B, but producer surplus decreases only by area C+D..
Figure 4 Figure 5
b. With very inelastic supply and very elastic demand, the burden of the tax on rubber
bands will be borne largely by sellers. As Figure 5 shows, consumer surplus does not
decline much, just by area A + B, while producer surplus falls substantially, by area C +
D. Compared to part (a), producers bear much more of the burden of the tax, and
consumers bear much less.
4. a. The deadweight loss from a tax on heating oil is likely to be greater in the fifth year after
it is imposed rather than the first year. In the first year, the demand for heating oil is
relatively inelastic, as people who own oil heaters are not likely to get rid of them right
away. But over time they may switch to other energy sources and people buying new
heaters for their homes will more likely choose gas or electric, so the tax will have a
greater impact on quantity. Thus, the deadweight loss of the tax will get larger over
time.
b. The tax revenue is likely to be higher in the first year after it is imposed than in the fifth
year. In the first year, demand is more inelastic, so the quantity does not decline as
much and tax revenue is relatively high. As time passes and more people substitute away
from oil, the quantity sold declines, as does tax revenue.
5. Because the demand for food is inelastic, a tax on food is a good way to raise revenue
because it leads to a small deadweight loss; thus taxing food is less inefficient than taxing
other things. But it is not a good way to raise revenue from an equity point of view, because
poorer people spend a higher proportion of their income on food. The tax would affect them
more than it would affect wealthier people.
6. a. This tax has such a high rate that it is not likely to raise much revenue. Because of the
high tax rate, the equilibrium quantity in the market is likely to be at or near zero.
b. Senator Moynihan's goal was probably to ban the use of hollow-tipped bullets. In this
case, the tax could be as effective as an outright ban.
7. a. Figure 6 illustrates the market for socks and the effects of the tax. Without a tax, the
equilibrium quantity would be Q1, the equilibrium price would be P1, total spending by
consumers equals total revenue for producers, which is P1 x Q1, which equals area B + C
+ D + E + F, and government revenue is zero. The imposition of a tax places a wedge
between the price buyers pay, PB, and the price sellers receive, PS, where PB = PS + tax.
The quantity sold declines to Q2. Now total spending by consumers is PB x Q2, which
equals area A + B + C + D, total revenue for producers is PS x Q2, which is area C + D,
and government tax revenue is Q2 x tax, which is area A + B.
b. Unless supply is perfectly elastic or demand is perfectly inelastic, the price received by
producers falls because of the tax. Total receipts for producers fall, because producers
lose revenue equal to area B + E + F.
Figure 6
c. The price paid by consumers rises, unless demand is perfectly elastic or supply is
perfectly inelastic. Whether total spending by consumers rises or falls depends on the
price elasticity of demand. If demand is elastic, the percentage decline in quantity
exceeds the percentage increase in price, so total spending declines. If demand is
inelastic, the percentage decline in quantity is less than the percentage increase in price,
so total spending rises. Whether total consumer spending falls or rises, consumer surplus
declines because of the increase in price and reduction in quantity.
8. Figure 7 illustrates the effects of the $2 subsidy on a good. Without the subsidy, the
equilibrium price is P1 and the equilibrium quantity is Q1. With the subsidy, buyers pay price
PB, producers receive price PS (where PS = PB + $2), and the quantity sold is Q2. The
following table illustrates the effect of the subsidy on consumer surplus, producer surplus,
government revenue, and total surplus. Because total surplus declines by area D + H, the
subsidy leads to a deadweight loss in that amount.
Before After Subsidy Change

Subsidy
Consumer
Surplus A+B A+B+E+F+G +(E + F + G)
Producer
Surplus E+I B+C+E+I +(B + C)
Government
Revenue 0 –(B + C + D + E + F + G + H) –(B + C + D + E + F + G + H)
Total Surplus A+B+E+I A+B–D+E–H+I –(D + H)
Figure 7
9. a. Figure 8 shows the effect of a $10 tax on hotel rooms. The tax revenue is represented by
areas A + B, which are equal to ($10)(900) = $9,000. The deadweight loss from the tax
is represented by areas C + D, which are equal to (0.5)($10)(100) = $500.
Figure 8 Figure 9
b. Figure 9 shows the effect of a $20 tax on hotel rooms. The tax revenue is represented by
areas A + B, which are equal to ($20)(800) = $16,000. The deadweight loss from the tax
is represented by areas C + D, which are equal to (0.5)($20)(200) = $2,000.
When the tax is doubled, the tax revenue rises by less than double, while the deadweight
loss rises by more than double. The higher tax creates a greater distortion to the market.
10. a. Setting quantity supplied equal to quantity demanded gives 2P = 300 – P. Adding P to
both sides of the equation gives 3P = 300. Dividing both sides by 3 gives P = 100.
Substituting P = 100 back into either equation for quantity demanded or supplied gives Q
= 200.
b. Now P is the price received by sellers and P +T is the price paid by buyers. Equating
quantity demanded to quantity supplied gives 2P = 300 − (P+T). Adding P to both sides
of the equation gives 3P = 300 – T. Dividing both sides by 3 gives P = 100 –T/3. This is
the price received by sellers. The buyers pay a price equal to the price received by sellers
plus the tax (P +T = 100 + 2T/3). The quantity sold is now Q = 2P = 200 – 2T/3.
c. Because tax revenue is equal to T x Q and Q = 200 – 2T/3, tax revenue equals 200T −
2T 2 /3. Figure 10 (on the next page) shows a graph of this relationship. Tax revenue is
zero at T = 0 and at T = 300.
Figure 10 Figure 11
d. As Figure 11 shows, the area of the triangle (laid on its side) that represents the
deadweight loss is 1/2 × base × height, where the base is the change in the price, which
is the size of the tax (T) and the height is the amount of the decline in quantity (2 T/3).
So the deadweight loss equals 1/2 × T × 2T/3 = T 2 /3. This rises exponentially from 0
(when T = 0) to 30,000 when T = 300, as shown in Figure 12.
Figure 12
e. A tax of $200 per unit is a bad policy, because tax revenue is declining at that tax level.
The government could reduce the tax to $150 per unit, get more tax revenue ($15,000
when the tax is $150 versus $13,333 when the tax is $200), and reduce the deadweight
loss (7,500 when the tax is $150 compared to 13,333 when the tax is $200).
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"Legion, we'll have to see what's down there," Foster said.
"We could come back later, with ropes and big insurance policies," I
said.
"But we won't," said Foster. "We've found what we were looking for—"
"Sure," I said, "and it serves us right. Are you sure you feel good
enough to make like Alice and the White Rabbit?"
"I'm sure. Let's go."
Foster thrust his legs into the opening, slid over the edge,
disappeared. I followed him. I eased down a few feet, glanced back
for a last look at the night sky, then lost my grip and slid. I hit bottom
hard enough to knock the wind out of me, and found myself lying on a
level floor.
"What is this place?" I dug the flashlight out of the rubble, flashed it
around. We were in a low-ceilinged room ten yards square. I saw
smooth walls, the dark bulks of massive shapes that made me think
of sarcophagi in Egyptian burial vaults—except that these threw back
highlights from dials and levers.
"For a couple of guys who get shy in the company of cops," I said,
"we've got a talent for doing the wrong thing. This is some kind of Top
Secret military installation."
"Impossible," Foster replied. "This couldn't be a modern structure, at
the bottom of a rubble-filled shaft—"
"Let's get out of here, fast," I said. "We've probably set off an alarm
already."
As if in answer, a low chime cut across our talk. Pearly light sprang
up on a square panel. I got to my feet, moved over to stare at it.
Foster came to my side.
"What do you make of it?" he said.
"I'm no expert on stone-age relics," I said. "But if that's not a radar
screen, I'll eat it."
I sat down in the single chair before the dusty control console, and
watched a red blip creep across the screen. Foster stood behind me.
"We owe a debt to that Ancient Sinner," he said. "Who would have
dreamed he'd lead us here?"
"Ancient Sinner, Hell," I said. "This place is as modernistic as next
year's juke box."
"Look at the symbols on the machines," Foster said. "They're identical
with those in the first section of the Journal."
"All pot-hooks look alike to me," I said. "It's this screen that's got me
worried. If I've got it doped out correctly, that blip is either a mighty
slow airplane—or it's at one hell of an altitude."
"Modern aircraft operate at great heights," Foster said.
"Not at this height," I said. "Give me a few more minutes to study
these scales...."
"There are a number of controls here," Foster said. "Obviously
intended to activate mechanisms—"
"Don't touch 'em," I said. "Unless you want to start World War III."
"I hardly think the results would be so drastic," Foster said. "Surely
this installation has a simple purpose, unconnected with modern wars
—but very possibly connected with the mystery of the Journal—and
of my own past."
"The less we know about this, the better," I said. "At least, if we don't
mess with anything, we can always claim we just stepped in here to
get out of the rain—"
"You're forgetting the Hunters," Foster said.
"Some new anti-personnel gimmick," I said.
"They came out of this shaft, Legion. It was opened by the pressure
of the Hunters, bursting out."
"Why did they pick that precise moment—just as we arrived?" I
asked.
"I think they were aroused," Foster said. "I think they sensed the
presence of their ancient foe."
I swung around to look at him.
"I see the way your thoughts are running," I said. "You're their Ancient
Foe, now, huh? Just let me get this straight: that means that umpteen
hundred years ago, you personally, had a fight with the Hunters—
here at Stonehenge. You killed a batch of them and ran. You hired
some kind of Viking ship and crossed the Atlantic. Later on, you lost
your memory, and started being a guy named Foster. A few weeks
ago you lost it again. Is that the picture?"
"More or less."
"And now we're a couple of hundred feet under Stonehenge—after a
brush with a crowd of luminous stinkbombs—and you're telling me
you'll be nine hundred on your next birthday."
"Remember the entry in the journal, Legion? 'I came to the place of
the Hunters, and it was a place I knew of old, and there was no hive,
but a Pit built by men of the Two worlds....'"
"Okay," I said. "So you're pushing a thousand."
I glanced at the screen, got out a scrap of paper, and scribbled a
rapid calculation. "Here's another big number for you. That object on
the screen is at an altitude—give or take a few percent—of thirty
thousand miles."
I tossed the pencil aside, swung around to frown at Foster. "What are
we mixed up in, Foster? Not that I really want to know. I'm ready to go
to a nice clean jail now, and pay my debt to society—"
"Calm down, Legion," Foster said. "You're raving."
"OK," I said, turning back to the screen. "You're the boss. Do what
you like. It's just my reflexes wanting to run. I've got no place to run
to. At least with you I've always got the wild hope that maybe you're
not completely nuts, and that somehow—"
I sat upright, eyes on the screen. "Look at this, Foster," I snapped. A
pattern of dots flashed across the screen, faded, flashed again....
"Some kind of IFF," I said. "A recognition signal. I wonder what we're
supposed to do now."
Foster watched the screen, saying nothing.
"I don't like that thing blinking at us," I said. "It makes me feel
conspicuous." I looked at the big red button beside the screen.
"Maybe if I pushed that...." Without waiting to think it over, I jabbed at
it.
A yellow light blinked on the control panel. On the screen, the pattern
of dots vanished. The red blip separated, a smaller blip moving off at
right angles to the main mass.
"I'm not sure you should have done that," Foster said.
"There is room for doubt," I said in a strained voice. "It looks like I've
launched a bomb from the ship overhead."
The climb back up the tunnel took three hours, and every foot of the
way I was listening to a refrain in my head: This may be it; this may
be it; this may be it....
I crawled out of the tunnel mouth and lay on my back, breathing hard.
Foster groped his way out beside me.
"We'll have to get to the highway," I said, untying the ten-foot rope of
ripped garments that had linked us during the climb. "There's a
telephone at the pub; we'll notify the authorities...." I glanced up.
"Hold it," I said. I grabbed Foster's arm and pointed overhead.
"What's that?"
Foster looked up. A brilliant point of blue light, brighter than a star,
grew perceptibly as we watched.
"Maybe we won't get to notify anybody after all," I said. "I think that's
our bomb—coming home to roost."
"That's illogical," Foster said. "The installation would hardly be
arranged merely to destroy itself in so complex a manner."
"Let's get out of here," I yelled.
"It's approaching us very rapidly," Foster said. "The distance we could
run in the next few minutes would be trivial by comparison with the
killing radius of a modern bomb. We'll be safer sheltered in the cleft
than in the open."
"We could slide back down the tunnel," I said.
"And be buried?"
"You're right; I'd rather fry on the surface."
We crouched, watching the blue glare directly overhead, growing
larger, brighter. I could see Foster's face by its light now.
"That's no bomb," Foster said. "It's not falling; it's coming down slowly
... like a—"
"Like a slowly falling bomb," I said. "And it's coming right down on top
of us. Goodbye, Foster. I can't claim it's been fun knowing you, but it's
been different. We'll feel the heat any second now. I hope it's fast."
The glaring disc was the size of the full moon now, unbearably bright.
It lit the plain like a pale blue sun. There was no sound. As it dropped
lower, the disc fore-shortened and I could see a dark shape above it,
dimly lit by the glare thrown back from the ground.
"The thing is the size of a ferry boat," I said.
"It's going to miss us," Foster said. "It will come to ground to the east
of us."
We watched the slender shape float down with dreamlike slowness,
now five hundred feet above, now three hundred, then hovering just
above the giant stones.
"It's coming down smack on top of Stonehenge," I yelled.
We watched as the vessel settled into place dead center on the

ancient ring of stones. For a moment they were vividly silhouetted
against the flood of blue radiance; then abruptly, the glare faded and
died.
"Foster," I said. "Do you think it's barely possible—"
A slit of yellow light appeared on the side of the hull, widened to a
square. A ladder extended itself, dropping down to touch the ground.
"If somebody with tentacles starts down that ladder," I said, in an
unnaturally shrill voice, "I'm getting out of here."
"No one will emerge," Foster said quietly. "I think we'll find, Legion,
that this ship of space is at our disposal."
"I'm not going aboard that thing," I said. "I'm not sure of much in this
world, but I'm sure of that."
"Legion," Foster said, "this is no twentieth century military vessel. It
obviously homed on the transmitter in the underground station, which
appears to be directly under the old monument—which is several
thousand years old—"
"And I'm supposed to believe the ship has been orbiting the Earth for
the last few thousand years, waiting for someone to push the red
button? You call that logical?"
"Given permanent materials—such as those the notebook is made of
—it's not impossible—or even difficult."
"We got out of the tunnel alive," I said. "Let's settle for that."
"We're on the verge of solving a mystery that goes back through the
centuries," Foster said. "A mystery that I've pursued, if I understand
the Journal, through many lifetimes—"
"One thing about losing your memory," I said. "You don't have any
fixed ideas to get in the way of your theories."
Foster smiled grimly. "The trail has brought us here. I must follow it—
wherever it leads."
I lay on the ground, staring up at the unbelievable shape, and the
beckoning square of light. "This ship—or whatever it is," I said: "It
drops down out of nowhere, and opens its doors—and you want to
walk right into the cosy interior—"
"Listen!" Foster cut in.
I heard a low rumbling then, a sound that rolled ominously, like distant
guns.
"More ships—" I started.
"Jet aircraft," Foster said. "From the bases in East Anglia probably. Of
course, they'll have tracked our ship in—"
"That's all for me!" I yelled, getting to my feet. "The secret's out—"
"Get down, Legion," Foster shouted. The engines were a blanketing
roar now.
"What for? They—"
Two long lines of fire traced themselves across the sky, curving down
—
I hit the dirt behind the stone in the same instant the rockets struck.
The shock wave slammed at the earth like a monster thunderclap,
and I saw the tunnel mouth collapse. I twisted, saw the red interior of
the jet tail-pipe as the fighter hurtled past, rolling into a climbing turn.
"They're crazy," I yelled. "Firing on—"
A second barrage blasted across my indignation. I hugged the muck
and waited while nine salvoes shook the earth. Then the rumble died,
reluctantly. The air reeked of high explosives.
"We'd have been dead now if we'd tried the tunnel," I gasped, spitting
dirt. "It caved at the first rocket. And if the ship was what you thought,
Foster, they've destroyed something—"
The sentence died unnoticed. The dust was settling and through it the
shape of the ship reared up, unchanged except that the square of
light was gone. As I watched, the door opened again and the ladder
ran out once more, invitingly.
"They'll try next time with atomics," I said. "That may be too much for
the ship's defenses—and it will sure as hell be too much for us—"
"Listen," Foster cut in. A deeper rumble was building in the distance.
"To the ship!" Foster called. He was up and running, and I hesitated
just long enough to think about trying for the highway and being
caught in the open—and then I was running, too. Ahead, Foster
stumbled crossing the ground that had been ripped up by the rocket
bursts, made it to the ladder, and went up it fast. The growl of the
approaching bombers grew, a snarl of deadly hatred. I leaped a still-
smoking stone fragment, took the ladder in two jumps, plunged into
the yellow-lit interior. Behind me, the door smacked shut.
I was standing in a luxuriously fitted circular room. There was a

pedestal in the center of the floor, from which a polished bar
projected. The bones of a man lay beside it. While I stared, Foster
sprang forward, seized the bar, and pulled. It slid back easily. The
lights flickered, and I had a moment of vertigo. Nothing else
happened.
"Try it the other way," I yelled. "The bombs will fall any second—" I
went for it, hand outstretched. Foster thrust in front of me. "Look!"
I stared at the glowing panel he was pointing to—a duplicate of the
one in the underground chamber. It showed a curved white line, with
a red point ascending from it.
"We're clear," Foster said. "We've made a successful take-off."
"But we can't be moving—there's no acceleration. There must be
sound-proofing—that's why we can't hear the noise of the bombers."
"No sound-proofing would help if we were at ground zero," Foster
said. "This ship is the product of an advanced science. We've left the
bombers far behind."
"Where are we going? Who's steering this thing?"
"It steers itself, I would judge," Foster said. "I don't know where we're
going, but we're well on the way. There's no doubting that."
I looked at him in amazement. "You like this, don't you, Foster? You're
having the time of your life."
"I can't deny that I'm delighted at this turn of events," Foster said.
"Don't you see? This vessel is a launch, or lifeboat, under automatic
control. And it's taking us to the mother ship."
"Okay, Foster," I said. "I'm with you." I looked at the skeleton on the
floor behind him, and added; "But I sure hope we have better luck
than the last passenger."
CHAPTER VII
It was two hours later, and Foster and I stood silent before a ten-foot
screen that had glowed into life when I touched a silver button beside
it. It showed us a vast emptiness of bottomless black, set thick with
corruscating points of polychrome brilliance that hurt to look at. And
against that backdrop: a ship, vast beyond imagining, blotting out half
the titanic vista with its bulk—
But dead.
Even from the distance of miles, I could sense it. The great black
torpedo shape, dull moonlight glinting along the unbelievable length
of its sleek flank, drifted: a derelict. I wondered for how many
centuries it had waited here—and for what?
"I feel," said Foster, "somehow—I'm coming home."
I tried to say something, croaked, cleared my throat.
"If this is your jitney," I said, "I hope they didn't leave the meter ticking
on you. We're broke."
"We're closing rapidly," said Foster. "Another ten minutes, I'd
guess...."
"How do we go about heaving to, alongside? You didn't come across
a book of instructions, did you?"
"I think I can predict that the approach will be automatic."
"This is your big moment, isn't it?" I said. "I've got to hand it to you,
pal; you've won out by pluck."
The ship appeared to move smoothly closer, looming over us, fine
golden lines of decorative filigree work visible now against the black.
A tiny square of pale light appeared, grew into a huge bay door that
swallowed us.
The screen went dark, there was a gentle jar, then motionlessness.
The port opened, silently.
"We've arrived," Foster said. "Shall we step out and have a look?"
"I wouldn't think of going back without one," I said. I followed him out
and stopped dead, gaping. I had expected an empty hold, bare metal
walls. Instead. I found a vaulted cavern, shadowed, mysterious, rich
with a thousand colors. There was a hint of strange perfume in the
air, and I heard low music that muttered among stalagmite-like
buttresses. There were pools, playing fountains, waterfalls, dim vistas
stretching away, lit by slanting rays of muted sunlight.
"What kind of place is it?" I asked. "It's like a fairyland, or a dream."
"It's not an earthly scheme of decoration," Foster said, "but I find it
strangely pleasing."
"Hey, look over there," I yelped suddenly, pointing. An empty-eyed

skull stared past me from the shadows at the base of a column.
Foster went over to the skull, stood looking down at it.
"There was a disaster here," he said. "That much is plain."
"It's creepy," I said. "Let's go back; I forgot to get film for my Brownie."
"The long-dead pose no threat," said Foster. He was kneeling,
looking at the white bones. He picked up something, stared at it.
"Look, Legion."
I went over. Foster held up a ring.
"We're onto something hot, pal," I said. "It's the twin to yours."
"I wonder ... who he was."
I shook my head. "If we knew that—and who killed him—or what—"
"Let's go on. The answers must be here somewhere." Foster moved
off toward a corridor that reminded me of a sunny avenue lined with
chestnut trees—though there were no trees, and no sun. I followed,
gaping.
For hours we wandered, looking, touching, not saying much but
saturated in wonder, like kids in a toy factory. We came across
another skeleton, lying among towering engines. Finally we paused in
a giant storeroom stacked high with supplies.
"Have you stopped to think, Foster," I said, fingering a length of rose-
violet cloth as thin as woven spider webs. "This boat's a treasure-
house of marketable items. Talk about the wealth of the Indies—"
"I seek only one thing here, my friend," Foster said; "my past."
"Sure," I said. "But just in case you don't find it, you might consider
the business angle. We can set up a regular shuttle run, hauling stuff
down—"
"You Earthmen," sighed Foster. "For you, every new experience is
immediately assessed in terms of its merchandising possibilities.
Well, I leave that to you."
"Okay okay," I said. "You go on ahead and scout around down that
way, if you want—where the technical-looking stuff is. I want to
browse around here for a while."
"As you wish."
"We'll meet at this end of the big hall we passed back there. Okay?"
Foster nodded and went on. I turned to a bin filled with what looked
like unset emeralds the size of walnuts. I picked up a handful, juggled
them lovingly.
"Anyone for marbles?" I murmured to myself.
Hours later I came along a corridor that was like a path through a
garden that was a forest, crossed a ballroom like a meadow floored in
fine-grained rust-red wood and shaded by giant ferns, and went
under an arch into the hall where Foster sat at a long table cut from
yellow marble. A light the color of sunrise gleamed through tall
pseudo-windows.
I dumped an armful of books on the table. "Look at these," I said. "All
made from the same stuff as the Journal. And the pictures...."
I flipped open one of the books, a heavy folio-sized volume, to a
double-page spread in color showing a group of bearded Arabs in
dingy white djellabas staring toward the camera, a flock of thin goats
in the background. It looked like the kind of picture the National
Geographic runs, except that the quality of the color and detail was
equal to the best color transparencies.
"I can't read the print," I said, "but I'm a whiz at looking at pictures.
Most of the books show scenes like I hope I never see in the flesh,
but I found a few that were made on Earth—God knows how long
ago."
"Travel books, perhaps," Foster said.
"Travel books that you could sell to any university on Earth for their
next year's budget. Take a look at this one."
Foster looked across at the panoramic shot of a procession of
shaven-headed men in white sarongs, carrying a miniature golden
boat on their shoulders, descending a long flight of white stone steps
leading from a colonnade of heroic human figures with folded arms
and painted faces. In the background, brick-red cliffs loomed up,
baked in desert heat.
"That's the temple of Hat-Shepsut in its prime," I said. "Which makes
this print close to four thousand years old. Here's another I
recognize." I turned to a smaller, aerial view, showing a gigantic
pyramid, its polished stone facing chipped in places and with a few
panels missing from the lower levels, revealing the cruder structure of
massive blocks beneath.
"That's one of the major pyramids, maybe Khufu's," I said. "It was
already a couple thousand years old, and falling into disrepair. And
look at this—" I opened another volume, showed Foster a vivid
photograph of a great shaggy elephant with a pinkish trunk upraised
between wide-curving yellow tusks.
"A mastodon," I said. "And there's a woolly rhino, and an ugly-looking
critter that must be a sabre-tooth. This book is old...."
"A lifetime of rummaging wouldn't exhaust the treasures aboard this
ship," said Foster.
"How about bones? Did you find any more?"
Foster nodded. "There was a disaster of some sort. Perhaps disease.
None of the bones was broken."
"I can't figure the one in the lifeboat," I said. "Why was he wearing a
necklace of bear's teeth?" I sat down across from Foster. "We've got
plenty of mysteries to solve, all right, but there are some other items
we'd better talk about. For instance: where's the kitchen? I'm getting
hungry."
Foster handed me a black rod from among several that lay on the
table. "I think this may be important," he said.
"What is it? a chop stick?"
"Touch it to your head, above the ear."
"What does it do—give you a massage?" I pressed it to my temple....
I was in a grey-walled room, facing a towering surface of ribbed
metal. I reached out, placed my hands over the proper perforations.
The housings opened. For apparent malfunction in the quaternary
field amplifiers, I knew, auto-inspection circuit override was necessary
before activation—
I blinked, looked around at the rod in my hand.
"I was in some kind of power-house," I said. "There was something
wrong with—with...."
"The Quaternary field amplifiers," Foster said.
"I seemed to be right there," I said. "I understood exactly what it was
all about."
"These are technical manuals," Foster said. "They'll tell us everything
we need to know about the ship."
"I was thinking about what I was getting ready to do," I said, "the way
you do when you're starting into a job; I was trouble-shooting the
Quaternary whatzits—and I knew how...."
Foster got to his feet and moved toward the doorway. "We'll have to
start at one end of the library and work our way through," he said. "It
will take us awhile, but we'll get the facts we need. Then we can
plan."
Foster picked a handful of briefing rods from the racks in the

comfortably furnished library and started in. The first thing we needed
was a clue as to where to look for food and beds, or for operating
instructions for the ship itself. I hoped we might find the equivalent of
a library card-catalog; then we could put our hands on what we
wanted in a hurry.
I went to the far end of the first rack and spotted a short row of red
rods that stood out vividly among the black ones. I took one out,
thought it over, decided it was unlikely that it was any more
dangerous than the others, and put it against my temple....
As the bells rang, I applied neuro-vascular tension, suppressed
cortical areas upsilon, zeta and iota, and stood by for—
I jerked the rod from my head, my ears still ringing with the shrill
alarm. The effect of the rods was like reality itself, but intensified, all
attention focussed single-mindedly on the experience at hand. I
thought of the entertainment potentialities of the idea. You could kill a
tiger, ride an airplane down in flames, face the heavyweight champion
—I wondered about the stronger sensations, like pain and fear.
Would they seem as real as the impulse to check the
whatchamacallits or tighten up your cortical thingamajigs?
I tried another rod.
At the sound of the apex-tone, I racked instruments, walked, not ran,
to the nearest transfer-channel—
Another:
Having assumed duty as Alert Officer, I reported first to coordination
Control via short-line, and confirmed rapport—
These were routine SOP's covering simple situations aboard ship. I
skipped a few, tried again:
Needing a xivometer, I keyed instruction-complex One, followed with
the code—
Three rods further along, I got this:

The situation falling outside my area of primary conditioning, I
reported in corpo to Technical Briefing, Level Nine, Section Four,
Sub-section Twelve, Preliminary. I recalled that it was now necessary
to supply my activity code ... my activity code ... my activity code.... (A
sensation of disorientation grew; confused images flickered like
vague background-noise; then a clear voice cut in:)
YOU HAVE SUFFERED PARTIAL PERSONALITY-FADE. DO NOT
BE ALARMED. SELECT A GENERAL BACKGROUND
ORIENTATION ROD FROM THE NEAREST EMERGENCY RACK.
ITS LOCATION IS ...
I was moving along the stacks, to pause in front of a niche where a U-
shaped plastic strip was clamped to the wall. I removed it, fitted it to
my head—
(Then:) I was moving along the stacks, to pause in front of a niche—
I was leaning against the wall, my head humming. The red stick lay
on the floor at my feet. That last bit had been potent: something about
a general background briefing—
"Hey, Foster!" I called, "I think I've got something...."
"As I see it," I said, "this background briefing should tell us all we
need to know about the ship; then we can plan our next move more
intelligently. We'll know what we're doing." I took the thing from the
wall, just as I had seemed to do in the phantom scene the red rod
had projected for me.
"These things make me dizzy," I said, handing it to Foster. "Anyway,
you're the logical one to try it."
He took the plastic shape, went to the reclining seat at the near end
of the library hall, and settled himself. "I have an idea this one will hit
harder than the others," he said.
He fitted the clamp to his head and ... instantly his eyes glazed; he
slumped back, limp.
"Foster!" I yelled. I jumped forward, started to pull the plastic piece
from his head, then hesitated. Maybe Foster's abrupt reaction was
standard procedure. In any case whatever harm this gadget could do
to Foster's brain had already been done. I might as well let the
process take its course. But I didn't like it much.
I went on reasoning with myself. After all, this was what the red rod
had indicated as normal procedure in a given emergency. Foster was
merely having his faded personality touched up. And his full-blown,
three-dimensional personality was what we needed to give us the
answers to a lot of the questions we'd been asking. Though the ship
and everything in it had lain unused and silent for forgotten millennia,
still the library should be good. The librarian was gone from his post
these thirty centuries, and Foster was lying unconscious, and I was
thirty thousand miles from home—but I shouldn't let trifles like that
worry me....
I got up and prowled the room. There wasn't much to look at except
stacks and more stacks. The knowledge stored here was fantastic,
both in magnitude and character. If I ever got home with a load of
these rods....
I strolled through a door leading to another room. It was small,
functional, dimly lit. The middle of the room was occupied by a large
and elaborate divan with a cap-shaped fitting at one end. Other
curious accoutrements were ranked along the walls. There wasn't
much in them to thrill me. But bone-wise I had hit the jackpot.
Two skeletons lay near the door, in the final slump of death. Another
lay beside the fancy couch. There was a long-bladed dagger beside
it.
I squatted beside the two near the door and examined them closely.
As far as I could tell, they were as human as I was. I wondered what
kind of men they had been, what kind of world they had come from,
that could build a ship like this and stock it as it was stocked.
The dagger that lay near the other bones was interesting: it seemed
to be made of a transparent orange metal, and its hilt was stamped in
a repeated pattern of the Two Worlds motif. It was the first clue as to
what had taken place among these men when they last lived: not a
complete clue, but a start.
I took a closer look at an apparatus like a dentist's chair parked
against the wall. There were spidery-looking metal arms mounted
above it, and a series of colored glass lenses. A row of dull silver
cylinders was racked against the wall. Another projected from a
socket at the side of the machine. I took it out and looked at it. It was
of plain pewter-colored plastic, heavy and smooth. I felt pretty sure it
was a close cousin to the chop sticks stored in the library. I wondered
what brand of information was recorded in it as I dropped it in my
pocket.
I lit a cigarette and went back out to where Foster lay. He was still in
the same position as when I had left him. I sat down on the floor
beside the couch to wait.
It was an hour before he stirred. He reached up, pulled off the plastic
head-piece, dropped it on the floor.
"Are you okay?" I asked.
Foster looked at me, his eyes travelling up to my uncombed hair and
down to my scuffed shoes. His eyes narrowed in a faint frown. Then
he said something—in a language that seemed to be all Z's and Q's.
"Enough surprises, Foster," I said hoarsely. "Talk American."
He stared into my eyes, then glanced around the room.
"This is a ship's library," he said.
I heaved a sigh of relief. Foster was watching my face. "What was it
all about?" I said. "What have you found out?"
"I know you," said Foster slowly. "Your name is Legion."
I nodded. I could feel myself getting tense again. "Sure, you know
me." I put a hand on his shoulder. "You remember: we were—"
He shook my hand off. "That is not the custom in Vallon," he said
coldly.
"Vallon?" I echoed. "What kind of routine is this, Foster?"
"Where are the others?"
"There's a couple of 'others' in the next room," I snapped. "But they've
lost a lot of weight. Outside of them there's only me—"

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Essentials of Economics 7th Edition

Gregory Mankiw Solutions Manual

APPLICATION: THE COSTS OF

WHAT’S NEW IN THE SEVENTH EDITION:

By the end of this chapter, students should understand:

➢ how taxes reduce consumer and producer surplus.

➢ the meaning and causes of the deadweight loss from a tax.

➢ why some taxes have larger deadweight losses than others.

CONTEXT AND PURPOSE:

I. The Deadweight Loss of Taxation

C. How a Tax Affects Market Participants

3. Welfare without a Tax

a. Consumer surplus is equal to: A + B + C.

b. Producer surplus is equal to: D + E + F.

c. Total surplus is equal to: A + B + C + D + E + F.

4. Welfare with a Tax

a. Consumer surplus is equal to: A.

b. Producer surplus is equal to: F.

c. Tax revenue is equal to: B + D.

d. Total surplus is equal to: A + B + D + F.

a. Consumer surplus changes by: –(B + C).

b. Producer surplus changes by: –(D + E).

c. Tax revenue changes by: +(B + D).

d. Total surplus changes by: –(C + E).

D. Deadweight Losses and the Gains from Trade

II. The Determinants of the Deadweight Loss

B. Case Study: The Deadweight Loss Debate

Activity 1—Labor Taxes

Type: In-class discussion

Points for Discussion

III. Deadweight Loss and Tax Revenue as Taxes Vary

A. As taxes increase, the deadweight loss from the tax increases.

D. Case Study: The Laffer Curve and Supply-Side Economics

3. Economists continue to debate Laffer’s argument.

a. Many believe that the 1980s refuted Laffer’s theory.

ALTERNATIVE CLASSROOM EXAMPLE:

▪ the price buyers pay will rise to $0.60.

E. In the News: The Tax Debate

Activity 2—Tax Alternatives

Type: In-class assignment

Common Answers and Points for Discussion

SOLUTIONS TO TEXT PROBLEMS:

Questions for Review

Quick Check Multiple Choice

Problems and Applications

Producer surplus would be E + F, because producers get surplus of D + E + F, then

Before After Subsidy Change

We watched as the vessel settled into place dead center on the

I was standing in a luxuriously fitted circular room. There was a

"Hey, look over there," I yelped suddenly, pointing. An empty-eyed

Foster picked a handful of briefing rods from the racks in the

Three rods further along, I got this:

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