Question

Suppose that a market is described by the following supply and demand equations: QS=2PQD=180−P Suppose that a tax of T is placed on buyers, so the new demand equation is as follows: Q0=180−(P+T) The new equilibrium price is now P=60−3π, and the new equilibrium quantity is Q=120−3x. Tax revenue is T×Q. Use the green points (thiangie symbol) to graph tax revenue for the following tax (T ) values: 0,30,60,90,120,150, and 180 . Use the green points (triangle symbol) to graph tax revenue for the following tax(T) values: 0,30,60,90,120,150, and 180 . The following graph shows the old and new equilibrium information and how the deadweight loss of a tax is the area of the triangle between the supply and demand curves: Recall that the area of a triangle is 21× Base × Height. According to this graph, the base of the deadweight loss triangle is , and the height is Use the black points (plus symbol) to graph deadweight loss for the following tax (T) values: 0,60,90, 120 , and 180 . The government now levies a tax on this good of $100 per unit. Which of the following statements are true? Check all that apply. The government could increase tax revenue by reducing the tax to $90. The government could decrease deadweight loss by reducing the tax. A tax of $180 would be even better in terms of the tax revenue it generates.

Answer 1

The government could increase tax revenue by reducing the tax to $90. The government could decrease deadweight loss by reducing the tax.

Step-by-step explanation:

Reducing the tax to $90 could potentially increase tax revenue because it falls within the range where the tax increase leads to a rise in revenue before reaching the point where higher taxation discourages consumer spending significantly. As seen in the graph, when the tax is set at $90, tax revenue increases without overly impacting the market, signifying a balance between revenue generation and consumer behavior.

Additionally, decreasing the tax could help in reducing deadweight loss. Deadweight loss occurs when the tax creates a discrepancy between the quantity demanded and supplied. By lowering the tax, the market can operate closer to the initial equilibrium, minimizing the loss of efficiency caused by the tax imposition. A tax reduction to $90 appears to strike a balance by reducing deadweight loss without compromising significant tax revenue.

The explanation illustrates that a reduction in tax from $180 to $90 improves tax revenue without imposing a heavy burden on market efficiency. This solution balances revenue generation and market equilibrium, reducing the negative impact of taxation while maintaining a favorable level of government income.