20 . The Laffer curve Government-imposed taxes cause reductions in the activity that is being taxed, which has important implications for revenue collections. To understand the effect of such a tax, consider the monthly market for rum, which is shown on the following graph. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey eld will change accordingly. Graph Input Tool 100 Market for Rum 90 I Quantity 40 80 (Bottles) '6 Demand Price Su l Price g 70 (Dollars per bottle) 60'00 (Dollar); per bottle) 40'00 .D e 60 Tax 3 (Dollars per bottle) 20'00 50 E g 40 LIJ Q 30 n: a. 20 10 010 20 30 40 50 60 70 80 90100 QUANTITY (Bottles) Imagine the government imposes a $20-per-bottle tax on suppliers. At this tax amount, the equilibrium quantity of rum is bottles, and the government collects $1,600 in tax revenue. Now calculate the government's tax revenue if it sets a tax of $0, $20, $40, $50, $60, $80, or $100 per bottle. (Hint: To nd the equilibrium quantity after the tax, adjust the "Quantity\" eld until the Tax equals the value of the per-unit tax.) Using the data you generate, plot a La'er curve by using the green points (triangle symbol) to plot total tax revenue at each of those tax levels. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. ('2) 2000 * 1800 1600 Laer Curve 1200 1000 800 TAX REVENUE (Dollars) 600 400 200 0102030405060708090100 TAX (Dollars per bottle) Imagine the government is currently imposing a $20-per-bottle tax on rum. True or False: The government can raise its tax revenue by increasing the per-unit tax on rum. 0 True 0 False Consider the deadweight loss generated in each of the following cases: no tax, a tax of $40 per bottle, and a tax of $80 per bottle. On the following graph, use the black curve (plus symbols) to illustrate the deadweight loss in these cases. (Hint: Remember that the area of a triangle is equal to % x Base X Height. In the case of a deadweight loss triangle found on the graph input tool, the base is the amount of the tax and the height is the reduction in quantity caused by the tax.) 2000 1800 Deadweight Loss 1600 1400 1200 1000 DEADWEIGHT LOSS (Dollars) 800 600 400 200 0 0 10 20 30 40 50 60 70 80 90 100 TAX (Dollars per bottle) As the tax per bottle increases, deadweight loss