The government is considering levying a tax of $50 per unit on suppliers of eith

Question

The government is considering levying a tax of $50 per unit on suppliers of either concert tickets or bus passes. The supply curve for each of these two goods is identical and is shown by S on each of the following graphs. The demand for concert tickets is shown by D1 (on the graph), and the demand for bus passes is shown by D2 (on the bottom graph).

Suppose the government were to tax concert tickets. The following graph shows the annual supply and demand for this good. It also shows the supply curve shifted up by the amount of the tax ($50 per unit).

On the following graph, use the green rectangle (triangle symbols) to shade the area that represents tax revenue. Then use the black triangle (X symbols) to shade the area that represents the deadweight loss associated with the tax.

Suppose the government were to tax bus passes. The following graph shows the annual supply and demand for this good, as well as the supply curve shifted up by the amount of the tax. On the following graph, again use the green rectangle (triangle symbols) to shade the area that represents tax revenue. Then use the black triangle (X symbols) to shade the area that represents the deadweight loss associated with the tax.

If the government taxes concert tickets, it receives ____(Choice: $5000; $10,000; $2,500; $7,500) in tax revenues and causes _____(Choice: $1,250, $5,000, $1,000, $3,000) of deadweight loss. If it taxes bus passes, it receives _______(Choice: $7500; $15,000; $10,000; $12,500) in tax revenues and causes _________(Choice: $5000; $1000; $1250; $3000) of deadweight loss. (Hint: You can see the areas of the objects you drew by placing your mouse over them.) Therefore, if the government wants to get more tax revenue with less deadweight loss, it should tax _____(Choice: concert tickets [D1] or bus passes [D2]). This is because, all else being equal, taxes on a good with relatively ______(lower/higher?) price elasticity of demand generate more tax revenue and less deadweight loss.

Explanation / Answer

Concert tickets

Tax revenues = $5000

Deadweight Loss = $5000

Bus Passes

Tax Revenue = $12500

Dead Weight Loss = $1250

Govt. should tax Bus passes.

lower price elasticity of demand

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