Question

11. The Laffer curve 

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. With no tax, the equilibrium quantity is 60 bottles. The following table shows the equilibrium quantity produced and sold in the market for various per unit taxes.

Tax (Dollars per bottle)	Quantity (Bottles)
0	60
20	48
40	36
50	30
60	24
80	12
100	0

 

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

At this tax amount, the equilibrium quantity of vodka is _______ 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. 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.

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

Answer 1

Table 1

Tax	Q	TR
0	60	0
20	48	960
40	36	1440
60	24	1440
80	12	960
100	0	0

Figure 1

1600 1400 1200 1000 800 600 200 20 40 60 80 Timi 120 Tax

S 48 bottles amd+ax v Yate an d taxve.rer wo . Jt ook s ke 、.n vet ed Ves parrs Laffen :FALSE