4. The Laffer curve Governmentimposed 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 eld will change accordingly. { Graph Input Tool K?) 50 _. Market for Cigarettes 45 . nggzsgw 40 ._. Demand Price Supply Price 35% 35 (Dollars per pack) 30'00 (Dollars per pack) 20'00 D. h 30 _ Tax g + (Dollars per pack) 10'00 E 25 - - - - - - 1+ 6 I Q 20 -+ I 3 I E 15 I Demand '3' I 10 I 5 I o 54 5 10 15 20 25 30 35 40 45 50 QUANTITY (Packs) Suppose the government imposes a $10-per-pack tax on suppliers. At this tax amount, the equilibrium quantity of cigarettes is :] packs, and the government collects in tax revenue. Now calculate the government's tax revenue if it sets a tax of $0, $10, $20, $25, $30, $40, or $50 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. (5\Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. 400 A 360 320 Laffer Curve 280 240 200 160 TAX REVENUE (Dollars) 120 80 4D 0 5 10 15 20 25 30 35 4D 45 50 TAX (Dollars per pack) Suppose the government is currently imposing a $20-perpack tax on cigarettes. True or False: The government can raise its tax revenue by increasing the per-unit tax on cigarettes. 0 True 0 False Consider the deadweight loss generated in each of the following cases: no tax, a tax of $20 per pack, and a tax of $40 per pack. On the following graph, use the black curve (plus symbols) to illustrate the deadwelght loss in these cases. (Hint: Remember that the area of a triangle is equal to % X Base X Height. In the case of a deadwelght loss triangle Found on the graph input tool, the base is the amount of the tax and the helght ls the reduction ln quahtlty caused by the tax.) /\\ True or False: The government can raise its tax revenue by increasing the per-unit tax on cigarettes. 0 True 0 False Consider the deadweight loss generated in each of the following cases: no tax, a tax of $20 per pack, and a tax of $40 per pack. On the following graph, use the black curve (plus symbols) to illustrate the deadwelght loss in these cases. (Hint: Remember that the area of a triangle is equal to g X Base X Height. In the case of a deadwelght 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.) 500 450 v 400 Deadweight Less 350 300 250 200 150 DEADWEIGHT LOSS (Dollars) 100 50 0 5 10 15 20 25 30 3. increases bya greater and greater amount TAX (Dollars per pack) increases and then decreases increases at a constant rate As the tax per pack increases, deadweight loss V . Grade It Now Save & Continue Continue without saving