Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050



Principles of Microeconomics

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

Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve. If a 10 cent per pound tax is increased to 15 cents, the government's tax revenue

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 increased tax on peanut butter.


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.

Option (a):

The demand curve is downward sloping, whereas the supply curves is upward sloping, and the increase in the tax rate from 10 percent to 15 percent will have less than 50 percent increase in the revenue to the government because both the curves are elastic and the increase in the tax rate will increase the price level and this will reduce the demand for the product. Thus, the total tax revenue will increase only by less than 50 percent and thus, option 'a' is correct.

Option (b):

Since both the demand and supply curves are elastic, the increase in the price due to increase in tax will reduce the total revenue and the tax revenue through the sale of the product...

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