solution

Consider a country with only two industries–Industry A and Industry B. Capital can be employed in either industry, and the value of the marginal product of capital differs in the two industries. Initially, there is no tax on the use of capital. The value of the marginal product of capital in Industry A is given by VMP_A=600-5K_A, where K_A is the quantity of capital employed in Industry A. The value of the marginal product of capital in Industry B is given by VMP_B=300-2K_B, where K_B is the quantity of capital employed in Industry B. There is a total of 130 units of capital available in the country.

Part 1) If there is no tax on capital in either industry, what will be the quantity of capital employed in Industry B?

[NOTE: If necessary, please round to the nearest whole number.]

units of capital in Industry B

Part 2) Now suppose the government decides to impose a $10 per unit on capital used in Industry B only. What is the equation for the value of the marginal product of capital in Industry B that incorporates this per unit tax?

[Fill in the blanks with whole numbers to complete the equation below.]

VMP_B(tax)= – *K_B

Part 3) This tax results in an excess burden because

multiple choice

• there are losses in Industry A with no offsetting gains in Industry B.

• there are losses in Industry B with no offsetting gains in Industry A.

• the losses in Industry A exceed the gains in Industry B.

• the losses in Industry B exceed the gains in Industry A.

• there are losses in Industry A and in Industry B.