Nn1

Consider a taxing authority who wishes to minimize excess burden subject to a particular level of tax revenue. If authority is taxing two goods X and Y whose prices are P_x and P_y t_x and t_y respectively.

i. What are the mathematical expression for the revenues raised and excess burden minimized by the taxing authority given the Q_x and Q_y are the quantities demanded of good x and y respectively and the price elasticity of demand for good x and y are e_x and e_y respectively.

ii. State formally the objective of the taxing authority given the expression in d(i) above.

iii. derive the inverse elasticity rule given the authority's objective d(ii9 above.

iv. When is the rule most applicable.

v. Given that the tax rates are percentage changes in the price of the two goods use the findings in d(iii) above to derive and state the Ramsey rule.