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The Players and the Goals
In this experiment, each team controls a firm that sells to a group of consumers.
Firms select what price to charge.
Lower price means consumers purchase more units.
Higher price means consumers purchase fewer units.
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The Players and the Goals
Goal: make the most profit possible.
Profit = Revenue – Cost
(Price per unit) (Units sold)
($1) (Units sold)
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Example
You will see a demand schedule like the one to the right.
The chart shows the number of units you will sell depending on what price you decide to charge.
You must choose what price to charge for your product so as to maximize your profit.
Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 940 $15.50 640$1.00 930 $16.00 630$1.50 920 $16.50 620$2.00 910 $17.00 610$2.50 900 $17.50 600$3.00 890 $18.00 590$3.50 880 $18.50 580$4.00 870 $19.00 570$4.50 860 $19.50 560$5.00 850 $20.00 550$5.50 840 $20.50 540$6.00 830 $21.00 530$6.50 820 $21.50 520$7.00 810 $22.00 510$7.50 800 $22.50 500$8.00 790 $23.00 490$8.50 780 $23.50 480$9.00 770 $24.00 470$9.50 760 $24.50 460
$10.00 750 $25.00 450$10.50 740 $25.50 440$11.00 730 $26.00 430$11.50 720 $26.50 420$12.00 710 $27.00 410$12.50 700 $27.50 400$13.00 690 $28.00 390$13.50 680 $28.50 380$14.00 670 $29.00 370$14.50 660 $29.50 360$15.00 650 $30.00 350
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Example
Suppose you charge $10.00 per unit.
How many units will you sell?
750
What is your revenue?
($10) (750) = $7,500
What is your cost?
($1) (750) = $750
What is your profit?
$7,500 – $750 = $6,750
Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 940 $15.50 640$1.00 930 $16.00 630$1.50 920 $16.50 620$2.00 910 $17.00 610$2.50 900 $17.50 600$3.00 890 $18.00 590$3.50 880 $18.50 580$4.00 870 $19.00 570$4.50 860 $19.50 560$5.00 850 $20.00 550$5.50 840 $20.50 540$6.00 830 $21.00 530$6.50 820 $21.50 520$7.00 810 $22.00 510$7.50 800 $22.50 500$8.00 790 $23.00 490$8.50 780 $23.50 480$9.00 770 $24.00 470$9.50 760 $24.50 460
$10.00 750 $25.00 450$10.50 740 $25.50 440$11.00 730 $26.00 430$11.50 720 $26.50 420$12.00 710 $27.00 410$12.50 700 $27.50 400$13.00 690 $28.00 390$13.50 680 $28.50 380$14.00 670 $29.00 370$14.50 660 $29.50 360$15.00 650 $30.00 350
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ExamplePrice per Unit Quantity Sold Price per Unit Quantity Sold
$0.50 940 $15.50 640$1.00 930 $16.00 630$1.50 920 $16.50 620$2.00 910 $17.00 610$2.50 900 $17.50 600$3.00 890 $18.00 590$3.50 880 $18.50 580$4.00 870 $19.00 570$4.50 860 $19.50 560$5.00 850 $20.00 550$5.50 840 $20.50 540$6.00 830 $21.00 530$6.50 820 $21.50 520$7.00 810 $22.00 510$7.50 800 $22.50 500$8.00 790 $23.00 490$8.50 780 $23.50 480$9.00 770 $24.00 470$9.50 760 $24.50 460
$10.00 750 $25.00 450$10.50 740 $25.50 440$11.00 730 $26.00 430$11.50 720 $26.50 420$12.00 710 $27.00 410$12.50 700 $27.50 400$13.00 690 $28.00 390$13.50 680 $28.50 380$14.00 670 $29.00 370$14.50 660 $29.50 360$15.00 650 $30.00 350
Suppose you charge $20.00 per unit.
How many units will you sell?
550
What is your revenue?
($20) (550) = $11,000
What is your cost?
($1) (550) = $550
What is your profit?
$11,000 – $550 = $10,450
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Example
Suppose you charge $10.00 per unit.
Profit = $6,750
Suppose you charge $20.00 per unit.
Profit = $10,450
Of these, $20.00 is the better price to charge.
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Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 78.7 $15.50 41.2$1.00 77.5 $16.00 39.9$1.50 76.2 $16.50 38.7$2.00 75.0 $17.00 37.5$2.50 73.7 $17.50 36.2$3.00 72.5 $18.00 35.0$3.50 71.2 $18.50 33.7$4.00 70.0 $19.00 32.5$4.50 68.7 $19.50 31.2$5.00 67.5 $20.00 30.0$5.50 66.2 $20.50 28.7$6.00 65.0 $21.00 27.5$6.50 63.7 $21.50 26.2$7.00 62.5 $22.00 25.0$7.50 61.2 $22.50 23.7$8.00 60.0 $23.00 22.5$8.50 58.7 $23.50 21.2$9.00 57.5 $24.00 20.0$9.50 56.2 $24.50 18.7$10.00 55.0 $25.00 17.5$10.50 53.7 $25.50 16.2$11.00 52.5 $26.00 15.0$11.50 51.2 $26.50 13.7$12.00 50.0 $27.00 12.5$12.50 48.7 $27.50 11.2$13.00 47.5 $28.00 10.0$13.50 46.2 $28.50 8.7$14.00 45.0 $29.00 7.5$14.50 43.7 $29.50 6.2$15.00 42.5 $30.00 5.0
Round 1
Choose the price you will charge for your product.
Every unit you sell costs you $1 to produce.
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Price per Unit Quantity Sold Revenue Cost Profit Price per Unit Quantity Sold Revenue Cost Profit$0.50 78.7 $39.35 $78.70 ($39.35) $15.50 41.2 $638.60 $41.20 $597.40$1.00 77.5 $77.50 $77.50 $0.00 $16.00 39.9 $638.40 $39.90 $598.50$1.50 76.2 $114.30 $76.20 $38.10 $16.50 38.7 $638.55 $38.70 $599.85$2.00 75.0 $150.00 $75.00 $75.00 $17.00 37.5 $637.50 $37.50 $600.00$2.50 73.7 $184.25 $73.70 $110.55 $17.50 36.2 $633.50 $36.20 $597.30$3.00 72.5 $217.50 $72.50 $145.00 $18.00 35.0 $630.00 $35.00 $595.00$3.50 71.2 $249.20 $71.20 $178.00 $18.50 33.7 $623.45 $33.70 $589.75$4.00 70.0 $280.00 $70.00 $210.00 $19.00 32.5 $617.50 $32.50 $585.00$4.50 68.7 $309.15 $68.70 $240.45 $19.50 31.2 $608.40 $31.20 $577.20$5.00 67.5 $337.50 $67.50 $270.00 $20.00 30.0 $600.00 $30.00 $570.00$5.50 66.2 $364.10 $66.20 $297.90 $20.50 28.7 $588.35 $28.70 $559.65$6.00 65.0 $390.00 $65.00 $325.00 $21.00 27.5 $577.50 $27.50 $550.00$6.50 63.7 $414.05 $63.70 $350.35 $21.50 26.2 $563.30 $26.20 $537.10$7.00 62.5 $437.50 $62.50 $375.00 $22.00 25.0 $550.00 $25.00 $525.00$7.50 61.2 $459.00 $61.20 $397.80 $22.50 23.7 $533.25 $23.70 $509.55$8.00 60.0 $480.00 $60.00 $420.00 $23.00 22.5 $517.50 $22.50 $495.00$8.50 58.7 $498.95 $58.70 $440.25 $23.50 21.2 $498.20 $21.20 $477.00$9.00 57.5 $517.50 $57.50 $460.00 $24.00 20.0 $480.00 $20.00 $460.00$9.50 56.2 $533.90 $56.20 $477.70 $24.50 18.7 $458.15 $18.70 $439.45$10.00 55.0 $550.00 $55.00 $495.00 $25.00 17.5 $437.50 $17.50 $420.00$10.50 53.7 $563.85 $53.70 $510.15 $25.50 16.2 $413.10 $16.20 $396.90$11.00 52.5 $577.50 $52.50 $525.00 $26.00 15.0 $390.00 $15.00 $375.00$11.50 51.2 $588.80 $51.20 $537.60 $26.50 13.7 $363.05 $13.70 $349.35$12.00 50.0 $600.00 $50.00 $550.00 $27.00 12.5 $337.50 $12.50 $325.00$12.50 48.7 $608.75 $48.70 $560.05 $27.50 11.2 $308.00 $11.20 $296.80$13.00 47.5 $617.50 $47.50 $570.00 $28.00 10.0 $280.00 $10.00 $270.00$13.50 46.2 $623.70 $46.20 $577.50 $28.50 8.7 $247.95 $8.70 $239.25$14.00 45.0 $630.00 $45.00 $585.00 $29.00 7.5 $217.50 $7.50 $210.00$14.50 43.7 $633.65 $43.70 $589.95 $29.50 6.2 $182.90 $6.20 $176.70$15.00 42.5 $637.50 $42.50 $595.00 $30.00 5.0 $150.00 $5.00 $145.00
Round 1
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Statutory vs. Economic Tax Burden (or tax incidence)Statutory tax burden is the amount of tax collected from a person.
Economic tax burden is the amount of tax paid by a person.
Example:
• With no taxes, the price of gas is $3.00 per gallon.
• The government imposes a 50 cent per gallon tax on gasoline.
• The tax is collected from the producer.
• In response to the tax, the producer raises the price of gas to $3.50.
Who bears the statutory and economic burdens of the tax?
Statutory burden is on the producer, but economic burden is on the consumer.
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Statutory vs. Economic Tax Burden (or tax incidence)Statutory tax burden is the amount of tax collected from a person.
Economic tax burden is the amount of tax paid by a person.
Example:
• With no taxes, the price of gas is $3.00 per gallon.
• The government imposes a 50 cent per gallon tax on gasoline.
• The tax is collected from the producer.
• In response to the tax, the producer does not change the price of gas.
Who bears the statutory and economic burdens of the tax?
Statutory burden is on the producer and economic burden is on the producer.
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Statutory vs. Economic Tax Burden (or tax incidence)Statutory tax burden is the amount of tax collected from a person.
Economic tax burden is the amount of tax paid by a person.
Example:
• With no taxes, a person earns $50,000 per year.
• The government imposes a $10,000 income tax.
• The tax is collected from the worker.
• In response to the tax, the employer gives the worker a $5,000 raise.
Who bears the statutory and economic burdens of the tax?
Statutory burden is on the worker, but economic burden is shared between the worker and the employer.
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Sales/Excise Tax
When the government imposes a tax, the price the consumer pays is no longer the same as the price the producer receives.
Example: $10 per unit tax.
The consumer pays $35 per unit, but the producer receives only $25 per unit.
We call the $35 the “consumer price” or the “price including tax” and the $25 the “producer price” or the “price excluding tax.”
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Round 2: Statutory Tax Burden is on Consumers
In this round, consumers will pay an additional $5 per unit tax.
The price consumers pay is the price you charge plus $5.
The statutory tax burden is on the consumer.
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Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 137 $15.50 61$1.00 134 $16.00 59$1.50 131 $16.50 57$2.00 128 $17.00 55$2.50 125 $17.50 53$3.00 123 $18.00 51$3.50 120 $18.50 50$4.00 117 $19.00 48$4.50 114 $19.50 46$5.00 112 $20.00 44$5.50 109 $20.50 42$6.00 106 $21.00 40$6.50 104 $21.50 39$7.00 101 $22.00 37$7.50 98 $22.50 35$8.00 96 $23.00 34$8.50 93 $23.50 32$9.00 91 $24.00 31$9.50 88 $24.50 29$10.00 86 $25.00 28$10.50 84 $25.50 26$11.00 81 $26.00 25$11.50 79 $26.50 23$12.00 77 $27.00 22$12.50 74 $27.50 20$13.00 72 $28.00 19$13.50 70 $28.50 18$14.00 68 $29.00 16$14.50 66 $29.50 15$15.00 64 $30.00 14
Round 2
In this round, consumers will pay an additional $5 per unit tax.
The consumer price is the price you charge plus the $5 tax.
If you charge, $7, how many units will consumers buy?77
What is your profit?
($7)(77) – ($1)(77) = $462
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Round 2
Choose the price you will charge for your product (the price excluding tax).
The price the consumer pays is $5 more than the price you charge.
Every unit you sell costs you $1 to produce.
Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 78.7 $15.50 41.2$1.00 77.5 $16.00 39.9$1.50 76.2 $16.50 38.7$2.00 75.0 $17.00 37.5$2.50 73.7 $17.50 36.2$3.00 72.5 $18.00 35.0$3.50 71.2 $18.50 33.7$4.00 70.0 $19.00 32.5$4.50 68.7 $19.50 31.2$5.00 67.5 $20.00 30.0$5.50 66.2 $20.50 28.7$6.00 65.0 $21.00 27.5$6.50 63.7 $21.50 26.2$7.00 62.5 $22.00 25.0$7.50 61.2 $22.50 23.7$8.00 60.0 $23.00 22.5$8.50 58.7 $23.50 21.2$9.00 57.5 $24.00 20.0$9.50 56.2 $24.50 18.7$10.00 55.0 $25.00 17.5$10.50 53.7 $25.50 16.2$11.00 52.5 $26.00 15.0$11.50 51.2 $26.50 13.7$12.00 50.0 $27.00 12.5$12.50 48.7 $27.50 11.2$13.00 47.5 $28.00 10.0$13.50 46.2 $28.50 8.7$14.00 45.0 $29.00 7.5$14.50 43.7 $29.50 6.2$15.00 42.5 $30.00 5.0
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Price per Unit Quantity Sold Revenue Cost Profit Price per Unit Quantity Sold Revenue Cost Profit$0.50 66.2 $33.10 $66.20 ($33.10) $15.50 28.7 $444.85 $28.70 $416.15$1.00 65.0 $65.00 $65.00 $0.00 $16.00 27.5 $440.00 $27.50 $412.50$1.50 63.7 $95.55 $63.70 $31.85 $16.50 26.2 $432.30 $26.20 $406.10$2.00 62.5 $125.00 $62.50 $62.50 $17.00 25.0 $425.00 $25.00 $400.00$2.50 61.2 $153.00 $61.20 $91.80 $17.50 23.7 $414.75 $23.70 $391.05$3.00 60.0 $180.00 $60.00 $120.00 $18.00 22.5 $405.00 $22.50 $382.50$3.50 58.7 $205.45 $58.70 $146.75 $18.50 21.2 $392.20 $21.20 $371.00$4.00 57.5 $230.00 $57.50 $172.50 $19.00 20.0 $380.00 $20.00 $360.00$4.50 56.2 $252.90 $56.20 $196.70 $19.50 18.7 $364.65 $18.70 $345.95$5.00 55.0 $275.00 $55.00 $220.00 $20.00 17.5 $350.00 $17.50 $332.50$5.50 53.7 $295.35 $53.70 $241.65 $20.50 16.2 $332.10 $16.20 $315.90$6.00 52.5 $315.00 $52.50 $262.50 $21.00 15.0 $315.00 $15.00 $300.00$6.50 51.2 $332.80 $51.20 $281.60 $21.50 13.7 $294.55 $13.70 $280.85$7.00 50.0 $350.00 $50.00 $300.00 $22.00 12.5 $275.00 $12.50 $262.50$7.50 48.7 $365.25 $48.70 $316.55 $22.50 11.2 $252.00 $11.20 $240.80$8.00 47.5 $380.00 $47.50 $332.50 $23.00 10.0 $230.00 $10.00 $220.00$8.50 46.2 $392.70 $46.20 $346.50 $23.50 8.7 $204.45 $8.70 $195.75$9.00 45.0 $405.00 $45.00 $360.00 $24.00 7.5 $180.00 $7.50 $172.50$9.50 43.7 $415.15 $43.70 $371.45 $24.50 6.2 $151.90 $6.20 $145.70$10.00 42.5 $425.00 $42.50 $382.50 $25.00 5.0 $125.00 $5.00 $120.00$10.50 41.2 $432.60 $41.20 $391.40$11.00 39.9 $438.90 $39.90 $399.00$11.50 38.7 $445.05 $38.70 $406.35$12.00 37.5 $450.00 $37.50 $412.50$12.50 36.2 $452.50 $36.20 $416.30$13.00 35.0 $455.00 $35.00 $420.00$13.50 33.7 $454.95 $33.70 $421.25$14.00 32.5 $455.00 $32.50 $422.50$14.50 31.2 $452.40 $31.20 $421.20$15.00 30.0 $450.00 $30.00 $420.00
Round 2
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Round 3: Statutory Tax Burden is on Producers
In this round, producers will pay a $5 per unit tax for every unit they sell.
The price consumers pay is the price you charge.
The statutory tax burden is on the producer.
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Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 137 $15.50 61$1.00 134 $16.00 59$1.50 131 $16.50 57$2.00 128 $17.00 55$2.50 125 $17.50 53$3.00 123 $18.00 51$3.50 120 $18.50 50$4.00 117 $19.00 48$4.50 114 $19.50 46$5.00 112 $20.00 44$5.50 109 $20.50 42$6.00 106 $21.00 40$6.50 104 $21.50 39$7.00 101 $22.00 37$7.50 98 $22.50 35$8.00 96 $23.00 34$8.50 93 $23.50 32$9.00 91 $24.00 31$9.50 88 $24.50 29$10.00 86 $25.00 28$10.50 84 $25.50 26$11.00 81 $26.00 25$11.50 79 $26.50 23$12.00 77 $27.00 22$12.50 74 $27.50 20$13.00 72 $28.00 19$13.50 70 $28.50 18$14.00 68 $29.00 16$14.50 66 $29.50 15$15.00 64 $30.00 14
Round 3
In this round, producers will pay a $5 per unit tax.
The price you receive is now $5 less than the price you charge.
If you charge, $7, how many units will consumers buy?101
What is your profit?
($7 – $5)(101) – ($1)(101) = $101
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Round 3
Choose the price you will charge for your product (you will pay the government $5 of this price).
The price you receive is $5 less than the price you charge.
Every unit you sell costs you $1 to produce.
Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 78.7 $15.50 41.2$1.00 77.5 $16.00 39.9$1.50 76.2 $16.50 38.7$2.00 75.0 $17.00 37.5$2.50 73.7 $17.50 36.2$3.00 72.5 $18.00 35.0$3.50 71.2 $18.50 33.7$4.00 70.0 $19.00 32.5$4.50 68.7 $19.50 31.2$5.00 67.5 $20.00 30.0$5.50 66.2 $20.50 28.7$6.00 65.0 $21.00 27.5$6.50 63.7 $21.50 26.2$7.00 62.5 $22.00 25.0$7.50 61.2 $22.50 23.7$8.00 60.0 $23.00 22.5$8.50 58.7 $23.50 21.2$9.00 57.5 $24.00 20.0$9.50 56.2 $24.50 18.7$10.00 55.0 $25.00 17.5$10.50 53.7 $25.50 16.2$11.00 52.5 $26.00 15.0$11.50 51.2 $26.50 13.7$12.00 50.0 $27.00 12.5$12.50 48.7 $27.50 11.2$13.00 47.5 $28.00 10.0$13.50 46.2 $28.50 8.7$14.00 45.0 $29.00 7.5$14.50 43.7 $29.50 6.2$15.00 42.5 $30.00 5.0
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Price per Unit Quantity Sold Revenue Cost Profit Price per Unit Quantity Sold Revenue Cost Profit$0.50 78.7 ($354.15) $78.70 ($432.85) $15.50 41.2 $432.60 $41.20 $391.40$1.00 77.5 ($310.00) $77.50 ($387.50) $16.00 39.9 $438.90 $39.90 $399.00$1.50 76.2 ($266.70) $76.20 ($342.90) $16.50 38.7 $445.05 $38.70 $406.35$2.00 75.0 ($225.00) $75.00 ($300.00) $17.00 37.5 $450.00 $37.50 $412.50$2.50 73.7 ($184.25) $73.70 ($257.95) $17.50 36.2 $452.50 $36.20 $416.30$3.00 72.5 ($145.00) $72.50 ($217.50) $18.00 35.0 $455.00 $35.00 $420.00$3.50 71.2 ($106.80) $71.20 ($178.00) $18.50 33.7 $454.95 $33.70 $421.25$4.00 70.0 ($70.00) $70.00 ($140.00) $19.00 32.5 $455.00 $32.50 $422.50$4.50 68.7 ($34.35) $68.70 ($103.05) $19.50 31.2 $452.40 $31.20 $421.20$5.00 67.5 $0.00 $67.50 ($67.50) $20.00 30.0 $450.00 $30.00 $420.00$5.50 66.2 $33.10 $66.20 ($33.10) $20.50 28.7 $444.85 $28.70 $416.15$6.00 65.0 $65.00 $65.00 $0.00 $21.00 27.5 $440.00 $27.50 $412.50$6.50 63.7 $95.55 $63.70 $31.85 $21.50 26.2 $432.30 $26.20 $406.10$7.00 62.5 $125.00 $62.50 $62.50 $22.00 25.0 $425.00 $25.00 $400.00$7.50 61.2 $153.00 $61.20 $91.80 $22.50 23.7 $414.75 $23.70 $391.05$8.00 60.0 $180.00 $60.00 $120.00 $23.00 22.5 $405.00 $22.50 $382.50$8.50 58.7 $205.45 $58.70 $146.75 $23.50 21.2 $392.20 $21.20 $371.00$9.00 57.5 $230.00 $57.50 $172.50 $24.00 20.0 $380.00 $20.00 $360.00$9.50 56.2 $252.90 $56.20 $196.70 $24.50 18.7 $364.65 $18.70 $345.95$10.00 55.0 $275.00 $55.00 $220.00 $25.00 17.5 $350.00 $17.50 $332.50$10.50 53.7 $295.35 $53.70 $241.65 $25.50 16.2 $332.10 $16.20 $315.90$11.00 52.5 $315.00 $52.50 $262.50 $26.00 15.0 $315.00 $15.00 $300.00$11.50 51.2 $332.80 $51.20 $281.60 $26.50 13.7 $294.55 $13.70 $280.85$12.00 50.0 $350.00 $50.00 $300.00 $27.00 12.5 $275.00 $12.50 $262.50$12.50 48.7 $365.25 $48.70 $316.55 $27.50 11.2 $252.00 $11.20 $240.80$13.00 47.5 $380.00 $47.50 $332.50 $28.00 10.0 $230.00 $10.00 $220.00$13.50 46.2 $392.70 $46.20 $346.50 $28.50 8.7 $204.45 $8.70 $195.75$14.00 45.0 $405.00 $45.00 $360.00 $29.00 7.5 $180.00 $7.50 $172.50$14.50 43.7 $415.15 $43.70 $371.45 $29.50 6.2 $151.90 $6.20 $145.70$15.00 42.5 $425.00 $42.50 $382.50 $30.00 5.0 $125.00 $5.00 $120.00
Round 3
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Luxury versus Necessity
Consumption of luxury goods is more sensitive to price changes.
Consumption of necessity goods is less sensitive to price changes.Example:
• At a price of $10 per ticket, Mark will see 10 movies per year.
• At a price of $12 per ticket, Mark will cut back to 5 movies per year.
20% rise in price results in a 50% reduction in consumption
Mark’s consumption is highly sensitive to price changes.
For Mark, movies are a luxury good.
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Luxury versus Necessity
Consumption of luxury goods is more sensitive to price changes.
Consumption of necessity goods is less sensitive to price changes.Example:
• At a price of $10 per ticket, Scott will see 10 movies per year.
• At a price of $12 per ticket, Scott will cut back to 9 movies per year.
20% rise in price results in a 10% reduction in consumption
Scott’s consumption is less sensitive to price changes.
For Scott, movies are a necessity good.
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Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 64.0 $15.50 18.4$1.00 62.1 $16.00 17.4$1.50 60.1 $16.50 16.3$2.00 58.2 $17.00 15.3$2.50 56.4 $17.50 14.4$3.00 54.5 $18.00 13.4$3.50 52.7 $18.50 12.5$4.00 51.0 $19.00 11.7$4.50 49.2 $19.50 10.8$5.00 47.5 $20.00 10.0$5.50 45.8 $20.50 9.2$6.00 44.2 $21.00 8.5$6.50 42.5 $21.50 7.7$7.00 40.9 $22.00 7.0$7.50 39.4 $22.50 6.4$8.00 37.8 $23.00 5.7$8.50 36.3 $23.50 5.1$9.00 34.9 $24.00 4.6$9.50 33.4 $24.50 4.0$10.00 32.0 $25.00 3.5$10.50 30.6 $25.50 3.0$11.00 29.3 $26.00 2.6$11.50 27.9 $26.50 2.1$12.00 26.6 $27.00 1.7$12.50 25.4 $27.50 1.4$13.00 24.1 $28.00 1.0$13.50 22.9 $28.50 0.7$14.00 21.8 $29.00 0.5$14.50 20.6 $29.50 0.2$15.00 19.5 $30.00 0.0
Round 4
Choose the price you will charge for your product.
Every unit you sell costs you $1 to produce.
There is no tax.
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Price per Unit Quantity Sold Revenue Cost Profit Price per Unit Quantity Sold Revenue Cost Profit$0.50 64.0 $32.00 $64.00 ($32.00) $15.50 18.4 $285.20 $18.40 $266.80$1.00 62.1 $62.10 $62.10 $0.00 $16.00 17.4 $278.40 $17.40 $261.00$1.50 60.1 $90.15 $60.10 $30.05 $16.50 16.3 $268.95 $16.30 $252.65$2.00 58.2 $116.40 $58.20 $58.20 $17.00 15.3 $260.10 $15.30 $244.80$2.50 56.4 $141.00 $56.40 $84.60 $17.50 14.4 $252.00 $14.40 $237.60$3.00 54.5 $163.50 $54.50 $109.00 $18.00 13.4 $241.20 $13.40 $227.80$3.50 52.7 $184.45 $52.70 $131.75 $18.50 12.5 $231.25 $12.50 $218.75$4.00 51.0 $204.00 $51.00 $153.00 $19.00 11.7 $222.30 $11.70 $210.60$4.50 49.2 $221.40 $49.20 $172.20 $19.50 10.8 $210.60 $10.80 $199.80$5.00 47.5 $237.50 $47.50 $190.00 $20.00 10.0 $200.00 $10.00 $190.00$5.50 45.8 $251.90 $45.80 $206.10 $20.50 9.2 $188.60 $9.20 $179.40$6.00 44.2 $265.20 $44.20 $221.00 $21.00 8.5 $178.50 $8.50 $170.00$6.50 42.5 $276.25 $42.50 $233.75 $21.50 7.7 $165.55 $7.70 $157.85$7.00 40.9 $286.30 $40.90 $245.40 $22.00 7.0 $154.00 $7.00 $147.00$7.50 39.4 $295.50 $39.40 $256.10 $22.50 6.4 $144.00 $6.40 $137.60$8.00 37.8 $302.40 $37.80 $264.60 $23.00 5.7 $131.10 $5.70 $125.40$8.50 36.3 $308.55 $36.30 $272.25 $23.50 5.1 $119.85 $5.10 $114.75$9.00 34.9 $314.10 $34.90 $279.20 $24.00 4.6 $110.40 $4.60 $105.80$9.50 33.4 $317.30 $33.40 $283.90 $24.50 4.0 $98.00 $4.00 $94.00$10.00 32.0 $320.00 $32.00 $288.00 $25.00 3.5 $87.50 $3.50 $84.00$10.50 30.6 $321.30 $30.60 $290.70 $25.50 3.0 $76.50 $3.00 $73.50$11.00 29.3 $322.30 $29.30 $293.00 $26.00 2.6 $67.60 $2.60 $65.00$11.50 27.9 $320.85 $27.90 $292.95 $26.50 2.1 $55.65 $2.10 $53.55$12.00 26.6 $319.20 $26.60 $292.60 $27.00 1.7 $45.90 $1.70 $44.20$12.50 25.4 $317.50 $25.40 $292.10 $27.50 1.4 $38.50 $1.40 $37.10$13.00 24.1 $313.30 $24.10 $289.20 $28.00 1.0 $28.00 $1.00 $27.00$13.50 22.9 $309.15 $22.90 $286.25 $28.50 0.7 $19.95 $0.70 $19.25$14.00 21.8 $305.20 $21.80 $283.40 $29.00 0.5 $14.50 $0.50 $14.00$14.50 20.6 $298.70 $20.60 $278.10 $29.50 0.2 $5.90 $0.20 $5.70$15.00 19.5 $292.50 $19.50 $273.00 $30.00 0.0 $0.00 $0.00 $0.00
Round 4
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Round 5 Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 64.0 $15.50 18.4$1.00 62.1 $16.00 17.4$1.50 60.1 $16.50 16.3$2.00 58.2 $17.00 15.3$2.50 56.4 $17.50 14.4$3.00 54.5 $18.00 13.4$3.50 52.7 $18.50 12.5$4.00 51.0 $19.00 11.7$4.50 49.2 $19.50 10.8$5.00 47.5 $20.00 10.0$5.50 45.8 $20.50 9.2$6.00 44.2 $21.00 8.5$6.50 42.5 $21.50 7.7$7.00 40.9 $22.00 7.0$7.50 39.4 $22.50 6.4$8.00 37.8 $23.00 5.7$8.50 36.3 $23.50 5.1$9.00 34.9 $24.00 4.6$9.50 33.4 $24.50 4.0$10.00 32.0 $25.00 3.5$10.50 30.6 $25.50 3.0$11.00 29.3 $26.00 2.6$11.50 27.9 $26.50 2.1$12.00 26.6 $27.00 1.7$12.50 25.4 $27.50 1.4$13.00 24.1 $28.00 1.0$13.50 22.9 $28.50 0.7$14.00 21.8 $29.00 0.5$14.50 20.6 $29.50 0.2$15.00 19.5 $30.00 0.0
Choose the price you will charge for your product (the price excluding tax).
The price the consumer pays is $5 more than the price you charge.
Every unit you sell costs you $1 to produce.
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Price per Unit Quantity Sold Revenue Cost Profit Price per Unit Quantity Sold Revenue Cost Profit$0.50 45.8 $22.90 $45.80 ($22.90) $15.50 9.2 $142.60 $9.20 $133.40$1.00 44.2 $44.20 $44.20 $0.00 $16.00 8.5 $136.00 $8.50 $127.50$1.50 42.5 $63.75 $42.50 $21.25 $16.50 7.7 $127.05 $7.70 $119.35$2.00 40.9 $81.80 $40.90 $40.90 $17.00 7.0 $119.00 $7.00 $112.00$2.50 39.4 $98.50 $39.40 $59.10 $17.50 6.4 $112.00 $6.40 $105.60$3.00 37.8 $113.40 $37.80 $75.60 $18.00 5.7 $102.60 $5.70 $96.90$3.50 36.3 $127.05 $36.30 $90.75 $18.50 5.1 $94.35 $5.10 $89.25$4.00 34.9 $139.60 $34.90 $104.70 $19.00 4.6 $87.40 $4.60 $82.80$4.50 33.4 $150.30 $33.40 $116.90 $19.50 4.0 $78.00 $4.00 $74.00$5.00 32.0 $160.00 $32.00 $128.00 $20.00 3.5 $70.00 $3.50 $66.50$5.50 30.6 $168.30 $30.60 $137.70 $20.50 3.0 $61.50 $3.00 $58.50$6.00 29.3 $175.80 $29.30 $146.50 $21.00 2.6 $54.60 $2.60 $52.00$6.50 27.9 $181.35 $27.90 $153.45 $21.50 2.1 $45.15 $2.10 $43.05$7.00 26.6 $186.20 $26.60 $159.60 $22.00 1.7 $37.40 $1.70 $35.70$7.50 25.4 $190.50 $25.40 $165.10 $22.50 1.4 $31.50 $1.40 $30.10$8.00 24.1 $192.80 $24.10 $168.70 $23.00 1.0 $23.00 $1.00 $22.00$8.50 22.9 $194.65 $22.90 $171.75 $23.50 0.7 $16.45 $0.70 $15.75$9.00 21.8 $196.20 $21.80 $174.40 $24.00 0.5 $12.00 $0.50 $11.50$9.50 20.6 $195.70 $20.60 $175.10 $24.50 0.2 $4.90 $0.20 $4.70$10.00 19.5 $195.00 $19.50 $175.50 $25.00 0.0 $0.00 $0.00 $0.00$10.50 18.4 $193.20 $18.40 $174.80$11.00 17.4 $191.40 $17.40 $174.00$11.50 16.3 $187.45 $16.30 $171.15$12.00 15.3 $183.60 $15.30 $168.30$12.50 14.4 $180.00 $14.40 $165.60$13.00 13.4 $174.20 $13.40 $160.80$13.50 12.5 $168.75 $12.50 $156.25$14.00 11.7 $163.80 $11.70 $152.10$14.50 10.8 $156.60 $10.80 $145.80$15.00 10.0 $150.00 $10.00 $140.00
Round 5
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Tax rates and tax revenue
In an attempt to increase tax revenue, the government increases the tax rate from $5 per unit to $20 per unit.
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Round 6 Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 64.0 $15.50 18.4$1.00 62.1 $16.00 17.4$1.50 60.1 $16.50 16.3$2.00 58.2 $17.00 15.3$2.50 56.4 $17.50 14.4$3.00 54.5 $18.00 13.4$3.50 52.7 $18.50 12.5$4.00 51.0 $19.00 11.7$4.50 49.2 $19.50 10.8$5.00 47.5 $20.00 10.0$5.50 45.8 $20.50 9.2$6.00 44.2 $21.00 8.5$6.50 42.5 $21.50 7.7$7.00 40.9 $22.00 7.0$7.50 39.4 $22.50 6.4$8.00 37.8 $23.00 5.7$8.50 36.3 $23.50 5.1$9.00 34.9 $24.00 4.6$9.50 33.4 $24.50 4.0$10.00 32.0 $25.00 3.5$10.50 30.6 $25.50 3.0$11.00 29.3 $26.00 2.6$11.50 27.9 $26.50 2.1$12.00 26.6 $27.00 1.7$12.50 25.4 $27.50 1.4$13.00 24.1 $28.00 1.0$13.50 22.9 $28.50 0.7$14.00 21.8 $29.00 0.5$14.50 20.6 $29.50 0.2$15.00 19.5 $30.00 0.0
Choose the price you will charge for your product (the price excluding tax).
The price the consumer pays is $20 more than the price you charge.
Every unit you sell costs you $1 to produce.
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Price per Unit Quantity Sold Revenue Cost Profit$0.50 9.2 $4.60 $9.20 ($4.60)$1.00 8.5 $8.50 $8.50 $0.00$1.50 7.7 $11.55 $7.70 $3.85$2.00 7.0 $14.00 $7.00 $7.00$2.50 6.4 $16.00 $6.40 $9.60$3.00 5.7 $17.10 $5.70 $11.40$3.50 5.1 $17.85 $5.10 $12.75$4.00 4.6 $18.40 $4.60 $13.80$4.50 4.0 $18.00 $4.00 $14.00$5.00 3.5 $17.50 $3.50 $14.00$5.50 3.0 $16.50 $3.00 $13.50$6.00 2.6 $15.60 $2.60 $13.00$6.50 2.1 $13.65 $2.10 $11.55$7.00 1.7 $11.90 $1.70 $10.20$7.50 1.4 $10.50 $1.40 $9.10$8.00 1.0 $8.00 $1.00 $7.00$8.50 0.7 $5.95 $0.70 $5.25$9.00 0.5 $4.50 $0.50 $4.00$9.50 0.2 $1.90 $0.20 $1.70$10.00 0.0 $0.00 $0.00 $0.00
Round 6
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Round 1 Round 2 Round 3
Retail Price $17.00 $14.00 $19.00Consumer Statutory Tax $0.00 $5.00 $0.00Producer Statutory Tax $0.00 $0.00 $5.00
Price Consumer Pays $17.00 $19.00 $19.00Price Producer Receives $17.00 $14.00 $14.00
Consumer's Tax Burden $0.00 $2.00 (40%) $2.00 (40%)Producer's Tax Burden $0.00 $3.00 (60%) $3.00 (60%)
Units Sold 37.5 32.5 32.5Producer's Profit $600.00 $422.50 $422.50Tax Revenue $0.00 $162.50 $162.50
Results
Producer’s loss due to the tax = $600 – $422.50 =
$177.50
Government’s gain due to the tax = $162.50
Consumers pay a higher price per unit for fewer
units.
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Round 1 Round 2 Round 3
Retail Price $17.00 $14.00 $19.00Consumer Statutory Tax $0.00 $5.00 $0.00Producer Statutory Tax $0.00 $0.00 $5.00
Price Consumer Pays $17.00 $19.00 $19.00Price Producer Receives $17.00 $14.00 $14.00
Consumer's Tax Burden $0.00 $2.00 (40%) $2.00 (40%)Producer's Tax Burden $0.00 $3.00 (60%) $3.00 (60%)
Units Sold 37.5 32.5 32.5Producer's Profit $600.00 $422.50 $422.50Tax Revenue $0.00 $162.50 $162.50
Results
Government has no control over who ultimately pays a tax.
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Round 4 Round 5 Round 6
Retail Price $11.00 $10.00 $4.50Consumer Statutory Tax $0.00 $5.00 $20.00Producer Statutory Tax $0.00 $0.00 $0.00
Price Consumer Pays $11.00 $15.00 $24.50Price Producer Receives $11.00 $10.00 $4.50
Consumer's Tax Burden $0.00 $4.00 (80%) $13.50 (68%)Producer's Tax Burden $0.00 $1.00 (20%) $6.50 (32%)
Units Sold 29.3 19.5 4.0Producer's Profit $293.00 $175.50 $14.00Tax Revenue $0.00 $97.50 $80.00
Results
Raising tax rates does not necessarily raise tax revenues.
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By law, workers pay one-half of Social Security taxes and employers
pay the other half.
Who bears the economic burden of the Social Security tax?
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-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%19
5119
5219
5319
5419
5519
5619
5719
5819
5919
6019
6119
6219
6319
6419
6519
6619
6719
6819
6919
7019
7119
7219
7319
7419
7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
05
Growth in Median Real Gross Wages (2 year rolling average)
Source: Social Security Administration and the U.S. Bureau of Labor Statistics.
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-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%19
5119
5219
5319
5419
5519
5619
5719
5819
5919
6019
6119
6219
6319
6419
6519
6619
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6819
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7019
7119
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7319
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7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
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8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
05
Growth in Median Real Gross Wages (2 year rolling average)
Average annual wage growth when SS tax increases = 1.0%
Average annual wage growth when SS tax does not change = 1.3%
Source: Social Security Administration and the U.S. Bureau of Labor Statistics.
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Average annual wage growth when SS tax increases = 1.0%
Average annual wage growth when SS tax does not change = 1.3%
Increasing SS tax slows average wage growth by 0.3%.
When SS tax rate increases, it increases (on average) by 0.3%
Employer passes on employer’s half of SS tax increases to the worker in the form of lower wages.
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Does increasing the Social Security tax rate increase Social Security tax
revenues?
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Source: U.S. Bureau of Labor Statistics.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%19
56
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
OASDI-HI Marginal Tax Rate (right axis)
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0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Growth in OASDI-HI Real Tax Revenue per Capita (left axis, 5-year moving average)
OASDI-HI Marginal Tax Rate (right axis)
Source: U.S. Bureau of Labor Statistics.
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0%
5%
10%
15%
20%
25%
30%
35%
40%
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
Capital Gains Tax Rate
Source: Gwartney, J.D. and R.G. Holcombe, 1997. Optimal Capital Gains Tax Policy. Report to the Joint Economic Committee of the United States Congress.
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0%
5%
10%
15%
20%
25%
30%
35%
40%
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
Billi
ons
1992
$
Capital Gains Tax Revenues (left axis) Capital Gains Tax Rate (right axis)
Source: Gwartney, J.D. and R.G. Holcombe, 1997. Optimal Capital Gains Tax Policy. Report to the Joint Economic Committee of the United States Congress.
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1990 Deficit Reduction Law: The “Luxury Tax”
Goal: Raise tax revenue by raising taxes on “the rich.”Means:10% excise tax on recreational planes.
Result: 80 fewer planes sold$130 million lost sales480 lost jobs
Estimated tax revenue: $6 million.
Actual tax revenue: $530,000.
Economic burden of the tax fell almost entirely on blue-collar workers. Government gained $1,100 for every job a worker lost.
Source: Joint Committee on Taxation, “Methodology and Issues in the Revenue Estimating Proecess” (JCX-2-95), January 23, 1995.
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Note: Marginal, not average, tax rates influence people’s behaviors.
Example
• Erin earns $80,000 and is taxed 20% on each dollar she earns.
• Xavier earns $80,000 and is taxed 10% on the first $71,111 and 100% on each dollar over $71,111.
Erin’s tax bill is $16,000.
Xavier’s tax bill is ($71,111)(0.1)+($80,000 – $71,111) = $16,000.
Each faces an average tax rate of $16,000 / $80,000 = 20%.
Which has incentive to earn more money?
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Tax rates aren’t the whole story. What about tax credits, deductions,
exemptions, etc.?
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Source: Clifford Thies, Shenandoah University
0%
25%
50%
75%
100%
125%
150%
0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000
Impl
icit
Mar
gina
l Tax
Rat
e
Earned Income
Implicit Marginal Tax Ratesdefined as: 1 - (change in Income - Taxes + Subsidies) / (change in Earned Income)
A person who is earning $25,000 gets a $1,000 raise.
After changes in taxes, credits, and benefits, the person is $1,400 worse off than before the raise.
$25,000
140%
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But we have to raise taxes to pay for spending, and we need more
spending to stimulate the economy.
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Source: Bureau of Economic Analysis
1955 – 2009
On average, a 1% increase in both spending and taxes is associated with a 0.85% decrease in economic growth.
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Source: Bureau of Economic Analysis
Average growth rates in government spending in the quarters prior to and after recessions that began at quarter t (quarterly, 1947.2 – 2009.4). The average recession four quarters.
Historically, government spending has been counter-cyclical it increases during expansions and decreases during recessions.
Even if stimulus spending worked, evidence suggests that the government can’t get its timing right.
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zOMG!
Do something! The rich are getting richer while the poor are getting
poorer!
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Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
% of Households in Each Income Bracket (2006$)
In 1980, 16% of US households earned less than $15,000 (in 2006
dollars).
In 1980, 8% of US households earned more than $100,000 (in
2006 dollars).
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% of Households in Each Income Bracket (2006$)
Ten years later, the proportion of US households earning less than $15,000 (in 2006 dollars) had shrunk to 15%...
…and the proportion earning over $100,000 had grown to 13% (in 2006
dollars).
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
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% of Households in Each Income Bracket (2006$)
From 1980 to 2006, the proportion of households earning less than $75,000 (in 2006 dollars) shrank from 83% to
70%...
…while the proportion earning over $75,000 (in 2006 dollars) grew from
17% to 30%.
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
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Conclusions
1.Tax revenue is a constant fraction of GDP.
2.Tax policy aimed at raising revenue will fail. Tax policy should be aimed at maximizing GDP growth.
3.Government cannot control who pays tax.
4.Tax policy aimed at targeting particular groups will fail. Tax policy should be aimed at minimizing economic drag.
5.Stimulus spending with tax increases actually causes the economy to contract.
6.Even if stimulus spending worked, evidence suggests that the government can’t get the timing right.
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In which world would each person rather live?
(prices are the same in the two worlds)
Household Income in World #1 Household Income in World #2Person 1 $32,000 $40,000Person 2 $33,500 $41,875Person 3 $35,000 $43,750Person 4 $36,500 $45,625Person 5 $38,000 $47,500Person 6 $39,500 $49,375Person 7 $41,000 $51,250Person 8 $42,500 $53,125Person 9 $44,000 $77,000
Person 10 $45,500 $79,625
In world #1, Person 10 earns 11% of all income.
In world #2, Person 10 earns 15% of all income.
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($30,000)
($20,000)
($10,000)
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100
Compiled from data published in 2003 Statistical Abstract of the United States, U.S. Bureau of the Census, and provided by the Social Security Administration
Expected annual Social Security tax payments
Expected annual Social Security benefits
Expected Tax and Benefits for Median Worker
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($30,000)
$20,000
$70,000
$120,000
$170,000
$220,000
$270,000
$320,000
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77
Compiled from data published in 2003 Statistical Abstract of the United States, U.S. Bureau of the Census, and provided by the Social Security Administration
Expected annual Social Security tax payments
Expected annual benefits from privatized accountThis chart assumes that 100% of the
worker’s current Social Security taxes are diverted to a private investment account yielding an 8% annual return.