3. Relationship between tax revenues, deadweight loss, and demandelasticity The

Question

3. Relationship between tax revenues, deadweight loss, and demandelasticity The government is considering levying a tax of $80 per unit on suppliers of either leather jackets or smart phones. 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 (on the first graph), and the demand for smart phones is shown by (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 ( ) shifted up by the amount of the proposed tax ($80 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.

The government is considering levying a tax of $80 per unit on suppliers of either leather jackets or smart phones. 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 D (on the first graph), and the demand for smart phones is shown by Ds (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 ($80 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 240 220 200 180 160 140 120 100 S+Tax Supply Tax Revenue Deadweight Loss 60 40 20 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Jackets)

Explanation / Answer

Tax Revenue for Leather Jackets=Area of Green Triangle=(140-60) x 150=80 x 150=12000

Dead Weight Loss for Leather Jackets=Area of Grey Triangle=1/2 Base x Height = .5 x (140-60) x (300-150)=6000

Tax Revenue for Smart Phones=Area of Green Triangle=(180-100) x 250=80 x 250=20000

Dead Weight Loss for Leather Jackets=Area of Grey Triangle=1/2 Base x Height = .5 x (180-100) x (300-250)=2000

Samrt Phones, Less

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