Consider the following simplified scenario. Imagine that the Australian national rugby union (for short, Rugby AU) has exclusive rights to organize the games played by the national team. Rugby AU decides that the next match, between the Wallabies and the All Blacks (i.e., the Australian and the New Zeeland national rugby teams), will be hosted at the Marvel Stadium in Melbourne. Rugby AU has no fixed costs for organizing the game, but it must pay a marginal cost MC of $20 per seat to the owners of the Marvel Stadium. Two types of tickets will be sold for the game: concession and full fare. Based on any official document that attests to their age, children and pensioners qualify to purchase concession tickets that offer a discounted price; everyone else pays the full fare. The demand for full-fare tickets is QF(P) = 120 – 2P. The demand for concession tickets is QC(P) = 80 – 2P. Q) Tax per unit (TU): The government decides to tax Rugby AU at $10 per ticket sold. Find the new optimal price and quantity that Rugby AU chooses and compute its profit . Compute the government’s tax revenue TRTU. Q) Lump sum tax (LS): Instead of a tax per unit, the government imposes a lump tax of $400 on Rugby AU. Find the new optimal price and quantity that Rugby AU chooses and compute its profit in this case. Q) Suppose that the government is looking to tax Rugby AU to raise revenue for building new sport facilities for kids and hires you to advise which one of the taxes above – a tax per unit or a lump sum – to implement. Which one of the two taxes would you recommend? Justify and explain why.
Consider the following simplified scenario. Imagine that the Australian national rugby union
(for short, Rugby AU) has exclusive rights to organize the games played by the national team.
Rugby AU decides that the next match, between the Wallabies and the All Blacks (i.e., the
Australian and the New Zeeland national rugby teams), will be hosted at the Marvel Stadium
in Melbourne. Rugby AU has no fixed costs for organizing the game, but it must pay a marginal
cost MC of $20 per seat to the owners of the Marvel Stadium. Two types of tickets will be sold
for the game: concession and full fare. Based on any official document that attests to their age,
children and pensioners qualify to purchase concession tickets that offer a discounted price;
everyone else pays the full fare. The demand for full-fare tickets is QF(P) = 120 – 2P. The
demand for concession tickets is QC(P) = 80 – 2P.
Q) Tax per unit (TU): The government decides to tax Rugby AU at $10 per ticket sold. Find the new optimal price and quantity that Rugby AU chooses and compute its profit . Compute the government’s tax revenue TRTU.
Q) Lump sum tax (LS): Instead of a tax per unit, the government imposes a lump tax of $400 on Rugby AU. Find the new optimal price and quantity that Rugby AU chooses and compute its profit in this case.
Q) Suppose that the government is looking to tax Rugby AU to raise revenue for building
new sport facilities for kids and hires you to advise which one of the taxes above – a
tax per unit or a lump sum – to implement. Which one of the two taxes would you
recommend? Justify and explain why.
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