Question ONESuppose the Zambian legislature passes a law requiring that 1 billion Kwacha a year be raised viatwo new taxes, one on good X and another on good Y, but leaves the choice up to the FinanceMinister on what rates to choose for tx and ty. Suppose that these goods are produced bycompetitive industries at constant marginal cost and suppose the demand and supply curves are foreach kind of good are known, and the goods are neither complements nor substitutes.(a) How should the governor choose the various tax rates to minimize the total excess burdenraised by the new taxes?[10 Marks](b) Finally, suppose that demand for good X is less elastic than demand for good Y. Does thatmean the tax rate on X will be higher or lower?[7.5 Marks](c) If the reason X demand is less elastic is that richer people consume more X and they canafford the extra taxes, does this undermine or enhance the case for the tax scheme youproposed?[7.5 Marks]

(a) The governor should fix the tax rates on items X and Y so that the tax burden is heavier on the…

Answered: Question ONE Suppose the Zambian…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter14: Monopoly

Section: Chapter Questions

Problem 14.8P

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