Suppose the Federal Government would like to levy a new specific per unit tax. T

Question

Suppose the Federal Government would like to levy a new specific per unit tax. They need your help as you are a member of the Council of Economic Advisers in trying to figure out on which good they should assess this nevw tax. The following scenarios describe the current situation in the two potential markets: 1 Scenario A Scenario B Q 3p Qp 100- 2p 6 D Q, Question 6 2 pts If the government had the option to tax either the good from scenario A or scenario B, which one would you recommend they tax to earn the most revenue? Why? HTML Editor Paragraph'

Explanation / Answer

Scenario 1)

E = -1.5

Scenario 2)

3P = 100 - 2P

5P = 100

P = 100/5

=20

Q = 3(20)

= 60

Ed = dq/dP * P/Q

= - 2 *20/60

= 40/60

= - 0.66

Demand more elastic in scenario 1, thus tax should not be levied on first market.

It should be imposed in market 2 only because demand is inelastic here.Revenue collection will increase only if demand happens to be inelastic.

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