Question

4. The Laffer curve Governments often place so-called sin taxes on goods or services such as cigarettes, alcohol, and pornography. These kinds of taxes are popular with politicians because they are usually more palatable to voters than income taxes. To understand the effect of such a tax, consider the monthly market for adult DVDS, 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 Graph Input Tool Market for Adult DVDS 40 36 Quantity (DVDS) 48 Supply 32 Supply Price (Dollars per DVD) Demand Price (Dollars per DVD) Tax Wedge (Dollars per DVD) 24.00 16.00 28 24 20 16 8.00 12 Demand 4 0 0 12 24 36 48 60 72 84 96 108 120 QUANTITY (DVDS) PRICE (Dollars per DVD) Suppose the government imposes an $8-per-DVD tax on suppliers At this tax amount, the equilibrium quantity of adult DVDS is DVDS, and the government collects $ in tax revenue Now calculate the government's tax revenue if it sets a tax of $0, $8, $16, $20, $24, $32, or $40 per DVD. (Hint: To find the equilibrium quantity after the tax, adjust the "Quantity" field until the Tax Wedge 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 ? 960 864 Laffer Curve 768 672 576 480 384 288 192 96 0 40 4 8 12 16 20 24 28 32 36 TAX (Dollars per DVD) TAX REVENUE (Dollars) Suppose the government is currently imposing a $24-per-DVD tax on adult DVDS. True or False: The government can raise its tax revenue by decreasing the per-unit tax on adult DVDS. True False Consider the deadweight loss generated in each of the following cases: no tax, a tax of $16 per DVD, and a tax of $32 per DVD. 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 tox 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.) Base X Height. In the case of 960 864 Deadweight Loss 768 672 576 480 384 288 192 96 0 0 4 8 12 16 20 24 28 32 36 40 TAX (Dollars per DVD) DEADWEIGHT LOSS (Dollars) As the tax per DVD increases, deadweight loss

Answer 1

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foY $ay, tax nevenue 576 for 3a, tax evenue = 384 $40, tex hevenve 700 600 S00 536 76 384 384 yo0 300 (00 C 40 60 70 Tay 9out de creautng The Can rai be its tay by adult dvos hevenue tar Pe-unit This R fahe s tmt Reason Suppore Govt OUD's16e Curyent unit ta on Govt cannot naide nevenue be ta (ncreong e Pes unit tax on Duo's foy pen means, Ine bat Current tay mevenue unit tax $596, if Aey increase to 33 16e svenue 9384 statment A Falhe geve

dead coerght lo => for tax, a tax ard $3 fos no tan dead weight losA height dead tweght loss ao 0- Base tax $0 hen the fox 16, (50-36) T dead otight uilibrium quantity 3) $3a, for dead uoeight loas L60-12)2 uilibrium Vuantity 12 769 h98 768 62 9ES 480 384 dead weight lOAk a&8 192 967 5 10 15 30 35 4a 45 auanti ty