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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping. If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax

a. increases by less than 50 percent and may even decline.

b. increases by exactly 50 percent.

c. increases by more than 50 percent.

d. The answer depends on whether supply or demand is more elastic.

To determine
The impact of tax on eggs.

Explanation

The tax is the unilateral payment from the people to the government. Tax is the main source of income of the government which can be used for carrying on the public expenditure of the government. The main types of taxes include the income tax, wealth tax and the professional tax. When there is a tax, it will lead to fall in the consumer surplus as well as in the producer surplus. As a result, the total surplus which is the summation of the consumer surplus and the producer surplus will fall and this fall will occur in the total surplus due to taxation which is known as the deadweight loss due to tax.

The supply curve for egg is upward sloping and linear and the demand curve for egg is also linear but downward sloping. Without the tax in the economy, the equilibrium price and demand for eggs are calculated by equating the supply curve and the demand curve. When there is a tax and the price of egg increases from $2 to $3, the price line will shift upwards and the result will be decline in the total surplus and will increase in the deadweight loss in the economy.

Option (c):

The demand curve is linear and downward sloping, whereas the supply curves is linear and upward sloping, and there is an increase in the price line by $1 which will have more than 50 percent increase in the deadweight loss because both the curves are linear and the intersection point will increase by $1 and the deadweight loss by more than 50 percent...

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