4. 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 cigarettes, 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 field will change accordingly. Graph Input Tool 10 _. Market for Cigarettes 9 Quantity 8 Supply (Packs) 40 3 Demand Price 600 Supply Price 4_00 g 7 (Dollars per pack) (Dollars per pack) 0. ' s _ _ _ _ - Tax 03)- + (Dollars per pack) 2'00 E 5 + B . Q 4 -+ I 3 I _ 3 n: I Demand a I 2 I ' I o wllluIlllli 0 1O 20 30 40 50 60 70 80 90 100 QUANTITY (Packs) Suppose the government imposes a $2pervpack tax on suppliers. At this tax amount, the equilibrium quantity of cigarettes is 40 packs, and the government collects $2 in tax revenue. Consider the deadweight loss generated in each of the following cases: no tax, a tax of $4 per pack, and a tax of $8 per pack. 0n 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.) 200 160 v 150 Deadweight Loss 1A0 120 100 DEADWEIGHT LOSS (Dollars) S 8 8 N o o 1 2 3 4 5 6 Increases and then decreases TAX (Dollars per pack) . Increases at a constant rate increases by a greater and greater amount As the tax per pack increases, deadwelght loss V . Now calculate the government's tax revenue if it sets a tax of $0, $2, $4, $5, $6, $8, or $10 per pack. (Hint: To find the equilibrium quantity after the tax, adjust the "Quantity" field until the Tax equals the value of the per-unit tax. ) Using the data you generate, plot a Laffer 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. 200 A 180 160 Laffer Curve 140 120 100 TAX REVENUE (Dollars) 8 60 40 20 0 2 3 4 5 6 8 9 10 TAX (Dollars per pack) Suppose the government is currently imposing a $3-per-pack tax on cigarettes. True or False: The government can raise its tax revenue by increasing the per-unit tax on cigarettes. True O False