Question

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 vodka, 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.

Suppose the government imposes a $20-per-bottle tax on suppliers.

At this tax amount, the equilibrium quantity of vodka is _______ 48 bottles, and the government collects $_______  in tax revenue.

Now calculate the government's tax revenue if it sets a tax of $0, $20, $40, $50, $60, $80, or $100 per bottle. (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.

Suppose the government is currently imposing a $60-per-bottle tax on vodka.

True or False: The government can raise its tax revenue by decreasing the per-unit tax on vodka.

Consider the deadweight loss generated in each of the following cases: no tax, a tax of $40 per bottle, and a tax of $80 per bottle.

On the following graph, use the black curve (plus symbo/s) to illustrate the deadweight loss in these cases. (Hint: Remember that the area of a triangle is equal to 1/2 × Base × 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.)

Answer 1

Suppose the government imposes $20 per bottle tax on suppliers.

As a result, the price buyers paid equals to $60 and price sellers receives equals to $40, At this tax amount, the equilibrium quantity of vodka is 48 bottles and government collects ($20)(48)= $960 in revenue.

To plot the laffer curve, we have to calculate the tax revenue at different tax rates, this is shown in the following table:

Tax	Quantity after tax	Tax revenue
0	60	0
20	48	960
40	36	1440
50	30	1500
60	24	1440
80	12	960
100	0	0

By plotting these points, we get the laffer curve as shown below:

Suppose the government is currently imposing a $60 per bottle tax on vodka.

TRUE because the government can raise its tax revenue by decreasing the per unit tax on vodka . As we can see in the above table or graph ,that when tax is $60 per bottle ,then tax revenue =$1440 and when tax is $50 ,then tax revenue is $1500.

Deadweight loss is the area of the triangle = (0.5)(Reduction in quantity after tax)(Tax amount)

Tax	Reduction in quantity	Deadweight loss
0	0	0
40	(60-36)=24	(0.5)(24)(40)=480
80	(60-12)=48	(0.5)(48)(80)=1920

By plotting these points ,we get the deadweight loss curve as shown below:

a Deadweight loss pollars) 2400 2160 -DWL 1680 1440 1200 -960 720 чеэ 240 o le 20 30 40 50 60 70 80 9. los - TAX (Dollars per bottle)

As the tax per bottle increases, deadweight loss increases by greater and greater amount this is shown in the above table and graph.