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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 cigarettes. With no tax, the equilibrium quantity is 100 packs. The following table shows the equilibrium quantity produced and sold in the market for various per unit taxes. Quantity (Dollars per pack) (Packs) Tax 100 4 80 60 10 50 12 40 16 20 20

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 cigarettes. With no tax, the equilibrium quantity is 100 packs. The following table shows the equilibrium quantity produced and sold in the market for various per unit taxes. Quantity (Dollars per pack) (Packs) Tax 100 4 80 60 10 50 12 40 16 20 20

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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### 11. The Laffer Curve 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 cigarettes. With no tax, the equilibrium quantity is 100 packs. The following table shows the equilibrium quantity produced and sold in the market for various per unit taxes. | **Tax (Dollars per pack)** | **Quantity (Packs)** | |----------------------------|----------------------| | 0 | 100 | | 4 | 80 | | 8 | 60 | | 10 | 50 | | 12 | 40 | | 16 | 20 | | 20 | 0 | Suppose the government imposes a $4-per-pack tax on suppliers. At this tax amount, the equilibrium quantity of cigarettes is ___ packs, and the government collects $ _____ in tax revenue. ### Explanation of Table: The table provided lists different tax amounts per cigarette pack and their corresponding equilibrium quantities. The equilibrium quantity decreases as the tax per pack increases, illustrating the inverse relationship between tax rates and quantity demanded. ### Activity: Using the information provided, fill in the blanks to determine the impact of a $4 tax per pack on the equilibrium quantity and the resulting government tax revenue. ### Instructions for Educators: Guide students through the concept of the Laffer curve and discuss the relationship between taxation and economic activity. Encourage them to use the data in the table to understand and predict how changes in tax rates affect market equilibrium and revenue generation.
Transcribed Image Text:### 11. The Laffer Curve 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 cigarettes. With no tax, the equilibrium quantity is 100 packs. The following table shows the equilibrium quantity produced and sold in the market for various per unit taxes. | **Tax (Dollars per pack)** | **Quantity (Packs)** | |----------------------------|----------------------| | 0 | 100 | | 4 | 80 | | 8 | 60 | | 10 | 50 | | 12 | 40 | | 16 | 20 | | 20 | 0 | Suppose the government imposes a $4-per-pack tax on suppliers. At this tax amount, the equilibrium quantity of cigarettes is ___ packs, and the government collects $ _____ in tax revenue. ### Explanation of Table: The table provided lists different tax amounts per cigarette pack and their corresponding equilibrium quantities. The equilibrium quantity decreases as the tax per pack increases, illustrating the inverse relationship between tax rates and quantity demanded. ### Activity: Using the information provided, fill in the blanks to determine the impact of a $4 tax per pack on the equilibrium quantity and the resulting government tax revenue. ### Instructions for Educators: Guide students through the concept of the Laffer curve and discuss the relationship between taxation and economic activity. Encourage them to use the data in the table to understand and predict how changes in tax rates affect market equilibrium and revenue generation.
### Tax Revenue Analysis: Laffer Curve Exploration Now calculate the government’s tax revenue if it sets a tax of $0, $4, $8, $10, $12, $16, or $20 per pack. 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. #### Graph Explanation: The provided graph is a coordinate system with the following axes: - The horizontal axis (X-axis) represents "TAX REVENUE (Dollars)" ranging from 0 to 800. - The vertical axis (Y-axis) represents "TAX RATE (Dollars per pack)" ranging from 0 to 20. The graph is intended to display the relationship between tax rate per pack and the total tax revenue, commonly represented as a Laffer Curve. The Laffer Curve illustrates that starting from zero, increasing tax rates initially raise tax revenue, but after a certain point, further increases in tax rates cause a drop in tax revenue. #### Hypothetical Scenario Suppose the government is currently imposing a $12-per-pack tax on cigarettes. **Question:** True or False: The government can raise its tax revenue by increasing the per-unit tax on cigarettes. - [ ] True - [ ] False
Transcribed Image Text:### Tax Revenue Analysis: Laffer Curve Exploration Now calculate the government’s tax revenue if it sets a tax of $0, $4, $8, $10, $12, $16, or $20 per pack. 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. #### Graph Explanation: The provided graph is a coordinate system with the following axes: - The horizontal axis (X-axis) represents "TAX REVENUE (Dollars)" ranging from 0 to 800. - The vertical axis (Y-axis) represents "TAX RATE (Dollars per pack)" ranging from 0 to 20. The graph is intended to display the relationship between tax rate per pack and the total tax revenue, commonly represented as a Laffer Curve. The Laffer Curve illustrates that starting from zero, increasing tax rates initially raise tax revenue, but after a certain point, further increases in tax rates cause a drop in tax revenue. #### Hypothetical Scenario Suppose the government is currently imposing a $12-per-pack tax on cigarettes. **Question:** True or False: The government can raise its tax revenue by increasing the per-unit tax on cigarettes. - [ ] True - [ ] False
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