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 cigarettes, 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 $4-per-pack tax on suppliers. 

At this tax amount, the equilibrium quantity of cigarettes is _______  packs, and the government collects $ _______  in tax revenue.

Now calculate the government's tax revenue if it sets a tax of $0, $4, $8, $10, $12, $16, or $20 per pack. (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 $12-per-pack tax on cigarettes. 

True or False: The government can raise its tax revenue by increasing the per unit tax on cigarettes. 

Consider the deadweight loss generated in each of the following cases: no tax, a tax of 58 per pack, and a tax of $16 per pack. 

On the following graph, use the black curve (plus symbols) to illustrate the deadweight loss in these cases. (Hint: Remember that the area of a triangle is equal to 1/2 x Base x 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 $4 per pack tax on suppliers.

As a result, the price buyers paid equals to $12 and price sellers receives equals to $8. At this tax amount, the equilibrium quantity of cigarettes is 80 packs and government collects ($4)(80)= $320 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	100	0
4	80	320
8	60	480
10	50	500
12	40	480
16	20	320
20	0	0

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

(ax Revenue (Cellars) 640 560 uno Cum 240 0 2 4 8 lo 12 14 16 18 20 TAX (Dellars per pact)

Suppose the government is currently imposing a $12 per pack tax on cigarettes.

FALSE because the government cannot raise its tax revenue by increasing the per unit tax on cigarettes. As we can see in the above table or graph ,that when tax is $12 per pack ,then tax revenue =$480 and when tax is $16,then tax revenue is $320.

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
8	(100-60)=40	(0.5)(8)(40)= 160
16	(100-20)=80	(0.5)(16)(80)=640

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

A readweigh 640 Soo 4 Чор 200 160 0 2 4 6 8 Tax 10 12 14 16 18 20 Dollars per pack)

As the tax per pack increases . deadweight loss increases by greater and greater amount as shown in the above table and graph.