The government is considering levying a tax of $120 per unit on suppliers of either leather jackets or smartphones. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for leather jackets is shown by DLDL (on the first graph), and the demand for smartphones is shown by DSDS (on the second graph). Suppose the government taxes leather jackets. The following graph shows the annual supply and demand for this good. It also shows the supply curve (S+TaxS+Tax) shifted up by the amount of the proposed tax ($120 per jacket). On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for leather jackets. Then use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. Instead, suppose the government taxes smartphones. The following graph shows the annual supply and demand for this good, as well as the supply curve shifted up by the amount of the proposed tax ($120 per phone). On the following graph, do for smartphones the same thing you did previously on the graph for leather jackets. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for smartphones. Then, use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax. omplete the following table with the tax revenue collected and deadweight loss caused by each of the tax proposals. If the Government Taxes... Tax Revenue Deadweight Loss (Dollars) (Dollars) Leather jackets at $120 per jacket Smartphones at $120 per phone Suppose the government wants to tax the good that will generate more tax revenue at a lower welfare cost. In this case, it should tax because, all else held constant, taxing a good with a relatively elastic demand generates larger tax revenue and smaller 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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The government is considering levying a tax of $120 per unit on suppliers of either leather jackets or smartphones. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for leather jackets is shown by DLDL (on the first graph), and the demand for smartphones is shown by DSDS (on the second graph).

Suppose the government taxes leather jackets. The following graph shows the annual supply and demand for this good. It also shows the supply curve (S+TaxS+Tax) shifted up by the amount of the proposed tax ($120 per jacket).

On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue for leather jackets. Then use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax.

Instead, suppose the government taxes smartphones. The following graph shows the annual supply and demand for this good, as well as the supply curve shifted up by the amount of the proposed tax ($120 per phone).

On the following graph, do for smartphones the same thing you did previously on the graph for leather jackets. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for smartphones. Then, use the black triangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax.

omplete the following table with the tax revenue collected and deadweight loss caused by each of the tax proposals.

If the Government Taxes...	Tax Revenue	Deadweight Loss
(Dollars)	(Dollars)
Leather jackets at $120 per jacket
Smartphones at $120 per phone

Suppose the government wants to tax the good that will generate more tax revenue at a lower welfare cost. In this case, it should tax because, all else held constant, taxing a good with a relatively elastic demand generates larger tax revenue and smaller deadweight loss.

Smartphones Market
240
220
S+Tax
Supply
200
Tax Revenue
180
160
Deadweight Loss
140
120
100
80
60
40
20
P's
50
100
150 200 250 300 350 400 450 500 550 600
QUANTITY (Phones)
PRICE (Dollars per phone)

Leather Jackets Market
240
220
S+Tax
Supply
200
Tax Revenue
180
160
Deadweight Loss
140
120
100
DL
80
60
40
50
100 150 200 250 300 350 400 450 500 550 600
QUANTITY (Jackets)
PRICE (Dollars per jacket)
20

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