Question

 The government is considering levying a tax of $80 per unit on suppliers of either leather jackets or smartphones. The supply curve for each of these two goods is identical, as you can see on each of the following graphs. The demand for leather jackets is shown by DL (on the first graph), and the demand for smartphones is shown by Ds (on the second graph).

 Suppose the government taxes leather jackets. The following graph shows the annual supply and demand for this good. It also shows the supply curve (S + Taz) shifted up by the amount of the proposed tax ($80 per jacket).

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

 Complete the following table with the tax revenue collected and deadweight loss caused by each of the tax proposals.

 Suppose the government wants to tax the good that will generate more tax revenue at a lower welfare cost. In this case, it should tax _______  because, all else held constant, taxing a good with a relatively

 _______ elastic demand generates larger tax revenue and smaller deadweight loss.

Answer 1