Suppose the equation for the demand curve for some product X is P = 8 - .6Q and the supply curve is P = 2 + .4Q. What are the equilibrium price and quantity? Now suppose an excise tax is imposed on X such that the new supply equation is P = 4 +.4Q. How much tax revenue will this excise tax yield the government? Graph the curves, and label the area of the graph that represents the tax collection “TC” and the area that represents the effificiency loss of the tax “EL.” Briefly explain why area EL is the effificiency loss of the tax but TC is not.
Suppose the equation for the demand curve for some product X is P = 8 - .6Q and the supply curve is P = 2 + .4Q. What are the equilibrium price and quantity? Now suppose an excise tax is imposed on X such that the new supply equation is P = 4 +.4Q. How much tax revenue will this excise tax yield the government? Graph the curves, and label the area of the graph that represents the tax collection “TC” and the area that represents the effificiency loss of the tax “EL.” Briefly explain why area EL is the effificiency loss of the tax but TC is not.
Principles of Microeconomics (MindTap Course List)
8th Edition
ISBN:9781305971493
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter8: Application: The Cost Of Taxation
Section: Chapter Questions
Problem 10PA
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