3. Relationship between tax revenues, deadweight loss, and demandelasticity The government is considering levying a tax...

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3. Relationship between tax revenues, deadweight loss, and demandelasticity The government is considering levying a tax of $120 per unit on suppliers of either leather jackets or smartphones. 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 Di (on the first graph), and the demand for smartphones 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 ($120 per jacket).

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business economics

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Answer 1

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The government should tax more on the Smartphones as the demand for smartphones is relatively INELASTIC, which would mean higher tax revenues for the government and a lower deadweight loss.

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Answer 2

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