ECON 1150
The government is considering placing a $4 per unit tax on either Harry Potter books or Ikea clocks. The supply and demand curves for each market are given as:
- Harry Potter books: Qd= 200 - 20P and Qs =P
- Ikea clocks: Qd =100-2P and Qs= P
a. On a single graph, draw and label the two demand curves and supply curves.
b. Using your economic intuition, explain which good should be taxed if the government wants to maximize tax revenue?
c. On another graph, show what would happen to the supply curve if a $4 tax was placed on each good, and shade in the two different tax revenues.
Homework Answers
a) Graph is provided below
b) HPBooks has a flatter slope and so demand is relatively elastic. Rising price when demand is elastic results in lowering the revenue. Hence government should tax Ikea clocks. This is relatively inelastic and so revenue is increased if tax is imposed.
c) It is shown below
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