As the tax per case increases, deadweight loss

Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter2: Mathematics For Microeconomics
Section: Chapter Questions
Problem 2.10P
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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 champagne, which is shown on the following graph.
Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.
Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.
PRICE (Dollars per case)
50
45
40
35
30
25
20
15
10
5
0
0
Supply
Demand
8 16 24 32 40 48 56 64 72 80
QUANTITY (Cases)
Graph Input Tool
Suppose the government imposes a $10-per-case tax on suppliers.
At this tax amount, the equilibrium quantity of champagne is
Market for Champagne
Quantity
(Cases)
Demand Price
(Dollars per case)
Tax
(Dollars per case)
32
30.00
10.00
Supply Price
(Dollars per case)
cases, and the government collects $
20.00
in tax revenue.
Transcribed Image Text: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 champagne, which is shown on the following graph. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. PRICE (Dollars per case) 50 45 40 35 30 25 20 15 10 5 0 0 Supply Demand 8 16 24 32 40 48 56 64 72 80 QUANTITY (Cases) Graph Input Tool Suppose the government imposes a $10-per-case tax on suppliers. At this tax amount, the equilibrium quantity of champagne is Market for Champagne Quantity (Cases) Demand Price (Dollars per case) Tax (Dollars per case) 32 30.00 10.00 Supply Price (Dollars per case) cases, and the government collects $ 20.00 in tax revenue.
Consider the deadweight loss generated in each of the following cases: no tax, a tax of $20 per case, and a tax of $40 per case.
On the following graph, use the black curve (plus symbols) to illustrate the deadweight loss in these cases. (Hint: Remember that the area of a
triangle is equal to X Base × Height. In the case of a deadweight loss triangle found on the graph input tool, the base is the amount of the tax and
the height is the reduction in quantity caused by the tax.)
DEADWEIGHT LOSS (Dollars)
800
720
640
560
480
400
320
240
160
80
0
0
5
10
15 20 25 30
TAX (Dollars per case)
35
As the tax per case increases, deadweight loss
40
45
50
Deadweight Loss
Transcribed Image Text:Consider the deadweight loss generated in each of the following cases: no tax, a tax of $20 per case, and a tax of $40 per case. On the following graph, use the black curve (plus symbols) to illustrate the deadweight loss in these cases. (Hint: Remember that the area of a triangle is equal to X Base × Height. In the case of a deadweight loss triangle found on the graph input tool, the base is the amount of the tax and the height is the reduction in quantity caused by the tax.) DEADWEIGHT LOSS (Dollars) 800 720 640 560 480 400 320 240 160 80 0 0 5 10 15 20 25 30 TAX (Dollars per case) 35 As the tax per case increases, deadweight loss 40 45 50 Deadweight Loss
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ISBN:
9781337517942
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NICHOLSON
Publisher:
Cengage