3. Relationship between tax revenues, deadweight loss, and demand elasticity The government is considering levying a tax of $25 per unit on suppliers of either windbreakers or bucket hats. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for windbreakers is shown by Dw (on the first graph), and the demand for bucket hats is shown by DB (on the second graph). Suppose the government taxes windbreakers. 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 ($25 per windbreaker). On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for windbreakers. Then use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. (?) PRICE (Dollars per windbreaker) 60 55 50 45 40 35 30 25 20 15 10 - 5 0 Windbreakers Market S+Tax Supply Dw 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Windbreakers) Tax Revenue Deadweight Loss

3. Relationship between tax revenues, deadweight loss, and demand elasticity The government is considering levying a tax of $25 per unit on suppliers of either windbreakers or bucket hats. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for windbreakers is shown by Dw (on the first graph), and the demand for bucket hats is shown by DB (on the second graph). Suppose the government taxes windbreakers. 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 ($25 per windbreaker). On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for windbreakers. Then use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. (?) PRICE (Dollars per windbreaker) 60 55 50 45 40 35 30 25 20 15 10 - 5 0 Windbreakers Market S+Tax Supply Dw 0 50 100 150 200 250 300 350 400 450 500 550 600 QUANTITY (Windbreakers) Tax Revenue Deadweight Loss

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose households supply 500 billion hours of labor per year and have a tax elasticity of supply of 0.16. If the tax rate is increased by 19.6 percent, by how many hours will the supply of labor decline? a) 28.67 billion b) 1.568 trillion c) 2.465 trillion d) 3.422 trillion e) 9.183 trillion
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Suppose that the supply of oil is elastic and demand for oil is inelastic. If the government taxes oil, who will bear most of the tax burden?
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Suppose a firm has demand and supply are given by: Qd = 17−  2Px and Q s = 4Px  − 1 c. How much tax revenue does the government earn with the $12 tax when the new equilibrium quantity is 2 units after tax .
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2
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Can you also show on diagrams please?
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