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Government-imposed taxes cause reductions in the activity that is being taxed, which has important implications for revenue collections. To understand the effect of such a tax, consider the monthly market for vodka. With no tax, the equilibrium quantity is 90 bottles. The following table shows the equilibrium quantity produced and sold in the market for various per unit taxes. Тах Quantity (Dollars per bottle) (Bottles) 90 20 72 40 54 50 45 60 36 80 18 100 Suppose the government imposes a $20-per-bottle tax on suppliers. At this tax amount, the equilibrium quantity of vodka is bottles, and the govermment collects s in tax revenue. Now calculate the government's tax revenue if it sets a tax of $0, $20, $40, $50, $60, $80, or $100 per bottle. Using the data you generate, plot a Laffer curve by using the green points (triangle symbol) to plot total tax revenue at each of those tax levels. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

Government-imposed taxes cause reductions in the activity that is being taxed, which has important implications for revenue collections. To understand the effect of such a tax, consider the monthly market for vodka. With no tax, the equilibrium quantity is 90 bottles. The following table shows the equilibrium quantity produced and sold in the market for various per unit taxes. Тах Quantity (Dollars per bottle) (Bottles) 90 20 72 40 54 50 45 60 36 80 18 100 Suppose the government imposes a $20-per-bottle tax on suppliers. At this tax amount, the equilibrium quantity of vodka is bottles, and the govermment collects s in tax revenue. Now calculate the government's tax revenue if it sets a tax of $0, $20, $40, $50, $60, $80, or $100 per bottle. Using the data you generate, plot a Laffer curve by using the green points (triangle symbol) to plot total tax revenue at each of those tax levels. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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macroeconmics question 11

### 11. The Laffer Curve **Introduction:** Government-imposed taxes cause reductions in the activity that is being taxed, which has important implications for revenue collections. **Understanding the Effect of Taxes:** To understand the effect of such a tax, consider the monthly market for vodka. With no tax, the equilibrium quantity is 90 bottles. The following table shows the equilibrium quantity produced and sold in the market for various per unit taxes. **Table:** | Tax (Dollars per bottle) | Quantity (Bottles) | |--------------------------|--------------------| | 0 | 90 | | 20 | 72 | | 40 | 54 | | 50 | 45 | | 60 | 30 | | 80 | 18 | | 100 | 0 | **Government Tax Imposition Scenario:** Suppose the government imposes a $20-per-bottle tax on suppliers. - At this tax amount, the equilibrium quantity of vodka is ____ bottles, and the government collects $____ in tax revenue. **Calculation and Plotting:** Now calculate the government's tax revenue if it sets a tax of $0, $20, $40, $50, $60, $80, or $100 per bottle. Using the data you generate, plot a Laffer curve by using the green points (triangle symbol) to plot total tax revenue at each of those tax levels. **Note:** Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. ### Graphical Explanation: The Laffer Curve is a graphical representation that illustrates the relationship between tax rates and the resulting levels of government tax revenue. The curve shows two effects of raising taxes: 1. **The arithmetic effect**: Higher tax rates increase tax revenue per unit. 2. **The economic effect**: Higher tax rates reduce the base of the activity being taxed. The Laffer Curve helps in understanding that when tax rates are too high, increasing tax rates further can lead to a decrease in tax revenue due to the reduction in the quantity of the taxed activity.
Transcribed Image Text:### 11. The Laffer Curve **Introduction:** Government-imposed taxes cause reductions in the activity that is being taxed, which has important implications for revenue collections. **Understanding the Effect of Taxes:** To understand the effect of such a tax, consider the monthly market for vodka. With no tax, the equilibrium quantity is 90 bottles. The following table shows the equilibrium quantity produced and sold in the market for various per unit taxes. **Table:** | Tax (Dollars per bottle) | Quantity (Bottles) | |--------------------------|--------------------| | 0 | 90 | | 20 | 72 | | 40 | 54 | | 50 | 45 | | 60 | 30 | | 80 | 18 | | 100 | 0 | **Government Tax Imposition Scenario:** Suppose the government imposes a $20-per-bottle tax on suppliers. - At this tax amount, the equilibrium quantity of vodka is ____ bottles, and the government collects $____ in tax revenue. **Calculation and Plotting:** Now calculate the government's tax revenue if it sets a tax of $0, $20, $40, $50, $60, $80, or $100 per bottle. Using the data you generate, plot a Laffer curve by using the green points (triangle symbol) to plot total tax revenue at each of those tax levels. **Note:** Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. ### Graphical Explanation: The Laffer Curve is a graphical representation that illustrates the relationship between tax rates and the resulting levels of government tax revenue. The curve shows two effects of raising taxes: 1. **The arithmetic effect**: Higher tax rates increase tax revenue per unit. 2. **The economic effect**: Higher tax rates reduce the base of the activity being taxed. The Laffer Curve helps in understanding that when tax rates are too high, increasing tax rates further can lead to a decrease in tax revenue due to the reduction in the quantity of the taxed activity.
**Understanding the Laffer Curve: Impact of Tax Rate on Tax Revenue** The graph presented represents the **Laffer Curve**, which illustrates the relationship between tax rates (shown on the Y-axis as "TAX RATE (Dollars per bottle)") and tax revenue (shown on the X-axis as "TAX REVENUE (Dollars)"). ### Key Components of the Graph: - **X-Axis (Horizontal)**: Represents the total tax revenue collected in dollars. - **Y-Axis (Vertical)**: Represents the tax rate applied per bottle in dollars. ### Scenario for Analysis: - The government currently imposes a $20-per-bottle tax on vodka. ### Question for Consideration: - **True or False**: The government can raise its tax revenue by increasing the per-unit tax on vodka. ### Visual Interpretation: The Laffer Curve typically shows that there is an optimal tax rate that maximizes tax revenue. Beyond this optimal rate, increasing the tax rate can actually decrease tax revenue because high rates can discourage consumption or production, leading to lower overall sales and thus lower tax revenue. As the curve generally follows a parabolic shape: - **Left Side of the Curve**: An increase in the tax rate would likely increase tax revenue up to a certain point. - **Right Side of the Curve**: An increase in the tax rate would likely decrease tax revenue due to diminished economic activity. ### Exercise: Based on the current $20 tax rate per bottle, students must determine whether increasing the tax rate will lead to higher tax revenue. Select one of the following options to answer this question: - **☐ True** - **☐ False** This exercise challenges students to apply the concept of the Laffer Curve to determine the effects of tax rate changes on government revenue, providing practical understanding rooted in economic theory.
Transcribed Image Text:**Understanding the Laffer Curve: Impact of Tax Rate on Tax Revenue** The graph presented represents the **Laffer Curve**, which illustrates the relationship between tax rates (shown on the Y-axis as "TAX RATE (Dollars per bottle)") and tax revenue (shown on the X-axis as "TAX REVENUE (Dollars)"). ### Key Components of the Graph: - **X-Axis (Horizontal)**: Represents the total tax revenue collected in dollars. - **Y-Axis (Vertical)**: Represents the tax rate applied per bottle in dollars. ### Scenario for Analysis: - The government currently imposes a $20-per-bottle tax on vodka. ### Question for Consideration: - **True or False**: The government can raise its tax revenue by increasing the per-unit tax on vodka. ### Visual Interpretation: The Laffer Curve typically shows that there is an optimal tax rate that maximizes tax revenue. Beyond this optimal rate, increasing the tax rate can actually decrease tax revenue because high rates can discourage consumption or production, leading to lower overall sales and thus lower tax revenue. As the curve generally follows a parabolic shape: - **Left Side of the Curve**: An increase in the tax rate would likely increase tax revenue up to a certain point. - **Right Side of the Curve**: An increase in the tax rate would likely decrease tax revenue due to diminished economic activity. ### Exercise: Based on the current $20 tax rate per bottle, students must determine whether increasing the tax rate will lead to higher tax revenue. Select one of the following options to answer this question: - **☐ True** - **☐ False** This exercise challenges students to apply the concept of the Laffer Curve to determine the effects of tax rate changes on government revenue, providing practical understanding rooted in economic theory.
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