Answered step by step
Verified Expert Solution
Question
1 Approved Answer
3. Relationship between tax revenues, deadweight loss, and demand elasticity The government is considering levying a tax of $120 per unit on suppliers of either
3. Relationship between tax revenues, deadweight loss, and demand elasticity The government is considering levying a tax of $120 per unit on suppliers of either leather jackets or smartphones. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for leather jackets is shown by Dy (on the first graph), and the demand for smartphones is shown by Is (on the second graph). Suppose the government taxes leather jackets. The following graph shows the annual supply and demand for this good. It also shows the supply curve (S + Tax) shifted up by the amount of the proposed tax ($120 per jacket). On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for leather jackets. Then use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. Leather Jackets Market 240 220 S+Tax Supply 200 Tax Revenue + Deadweight Loss PRICE (Dollars per jacket) 50 100 150 200 250 300 350 400 450 500 550 800 QUANTITY (Jackets)Instead, suppose the government taxes smartphones. The following graph shows the annual supply and demand for this good, as well as the supply curve shifted up by the amount of the proposed tax ($120 per phone). On the following graph, do for smartphones the same thing you did previously on the graph for leather jackets. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for smartphones. Then, use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. (?) Smartphones Market S+Tax Supply Tax Revenue Deadweight Loss PRICE (Dollars per phone) DS 0 50 100 150 200 250 300 350 400 450 500 550 800 QUANTITY (Phones) Complete the following table with the tax revenue collected and deadweight loss caused by each of the tax proposals. Tax Revenue Deadweight Loss If the Government Taxes... (Dollars) (Dollars) Leather jackets at $120 per jacket Smartphones at $120 per phone Suppose the government wants to tax the good that will generate more tax revenue at a lower welfare cost. In this case, it should tax because, all else held constant, taxing a good with a relatively elastic demand generates larger tax revenue and smaller deadweight loss
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started