(10 points). The market for tennis shoes has a horizontal supply curve and a lin
ID: 1192821 • Letter: #
Question
(10 points). The market for tennis shoes has a horizontal supply curve and a linear, downward-sloping demand curve. Currently the government imposes a tax of t on every pair of tennis shoes sold and does not tax other goods. The government is considering a plan to double the tax on tennis shoes, while leaving other goods untaxed. Which of the following statements is correct. Justify your answer graphically. If the tax is doubled, then
1. the total deadweight loss caused by the doubled tax will be exactly twice the original deadweight loss.
2. the total deadweight loss caused by the doubled tax will be more than twice the original deadweight loss.
3. the total deadweight loss caused by the doubled tax will be less than twice the original deadweight loss.
4. to know if doubling the tax would more than double the deadweight loss, we would have to know the slope of the demand curve.
Explanation / Answer
Answer: Here supply has been depicted as the perfectly elastic. Thus whole burden shall be on the consumer. When tax is imposed price shall increase and consumer will pay it. But when again tax is levied, now deadweight loss shall be more due to shape of demand curve (Downward sloping, more elastic at lower point)
Thus correct answer is(1)
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