Suppose the inverse demand curve for good M is given by the equation PM= 40 – 0.10*Qm, andthe supply curve is perfectly elastic (horizontal) at $4. Good M |s presently taxed at $8 per unit.Good K (which is independent of good M) has an inverse demand curve,PK = 20 – 0.05*QK, and is also perfectly elastic at $2. Good K is untaxed.a. How much tax revenue is collected and what is the excess burden of the $8 tax on M?b. How much revenue is collected if the tax on good M is reduced to $4 per unit and good K istaxed at $4 per unit?c. What is the total excess burden of taxing both goods at $4 per unit?d. Which tax system is preferable from the point of view of economic efficiency?

In this question, there are two goods :-good M and good K Both these goods are independent to each…

a. How much tax revenue is collected and what is the excess burden of the $8 tax on M? b. How much revenue is collected if the tax on good M is reduced to $4 per unit and good K is taxed at $4 per unit? c. What is the total excess burden of taxing both goods at $4 per unit?

a. How much tax revenue is collected and what is the excess burden of the $8 tax on M? b. How much revenue is collected if the tax on good M is reduced to $4 per unit and good K is taxed at $4 per unit? c. What is the total excess burden of taxing both goods at $4 per unit?

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter5: Elasticity Of Demand And Supply

Section5.A: Appendix: Price Elasticity And Tax Incidence

Problem 2AQ

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Question

Suppose the inverse demand curve for good M is given by the equation PM= 40 – 0.10*Qm, and
the supply curve is perfectly elastic (horizontal) at $4. Good M |s presently taxed at $8 per unit.
Good K (which is independent of good M) has an inverse demand curve,
PK = 20 – 0.05*QK, and is also perfectly elastic at $2. Good K is untaxed.
a. How much tax revenue is collected and what is the excess burden of the $8 tax on M?
b. How much revenue is collected if the tax on good M is reduced to $4 per unit and good K is
taxed at $4 per unit?
c. What is the total excess burden of taxing both goods at $4 per unit?
d. Which tax system is preferable from the point of view of economic efficiency?

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