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Suppose the govemment is thinking about levying a per-unit tax of $100 on firms supplying either gaming consoles or internet routers. The sup curves for both of the two goods are identical, as given by the following graphs. The demand for gaming consoles is given by D

C

(on the first g and the demand for internet routers is given by D
n

(on the second graph). Suppose the govemment decides to tax gaming consoles. The following graph plots the yearly demand and supply for this good. It also plots anc supply curve (S+Tax) shifted upward by the proposed tax amount ( $100 per console). On the following graph, use the green rectangle (riangle symbols) to shade the ared that represents zax revenue for gaming consoles. Then use black thiangle (plus symbols) to shade the area that represents the deadweight loss associated with the tax: On the following graph, perform the same exercise that you did on the graph for gaming cansoles. Use the green rectangle (triangle symbols) to shade the area that represents tax revenue for intemet routers. Then, use the black triangle (plus symbols) to shade the area that represents the deadweight loss assoclated with the tax. burdenti of the twa Lex lans are equal.?

2 Answers

4 votes

Final answer:

When the government introduces a per-unit tax on gaming consoles and internet routers, it creates a wedge between the price paid by consumers and the price received by producers. The tax revenue is represented by the shaded area, and the deadweight loss associated with the tax is represented by the black triangle.

Step-by-step explanation:

In this scenario, the government is considering levying a per-unit tax of $100 on firms supplying gaming consoles and internet routers. The supply curves for both goods are identical. When a tax is introduced, it creates a wedge between the price paid by consumers and the price received by producers. The tax revenue is represented by the shaded area, and the deadweight loss associated with the tax is represented by the black triangle.

User Lorenzo Rigamonti
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1 vote

Final answer:

The imposition of a per-unit tax shifts the supply curve upwards, causing a wedge between the price paid by consumers and received by producers, leading to tax revenue and deadweight loss.

Step-by-step explanation:

When a per-unit tax is introduced into a market, the supply curve shifts upwards by the amount of the tax. The tax creates a wedge between the price consumers pay (Pc) and the price producers receive (Pp). In markets where the supply is inelastic and demand is elastic, like beachfront hotels, the tax burden falls disproportionately on the sellers. The tax revenue, represented by the shaded area on a graph, is obtained by multiplying the tax per unit by the quantity sold (Qt). A deadweight loss arises from the reduction in trade due to the tax, and this is shown as the black triangle area on the graph. When both the demand and supply are elastic, applying a per-unit tax tends to generate lower revenue, as it leads to significant reductions in the quantity bought and sold.

User Alcalyn
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