Suppose the Inverse Demand Curve for Good a Is Given

question 24

Essay

Suppose the inverse demand curve for good A is given by the equation PA = 10 - QA/10, and the supply curve is perfectly elastic (horizontal)at $1. Good A is presently taxed at $2 per unit. Good B (which is independent of good A)has an inverse demand curve, PB = 5 - QB/20, and supply is also perfectly elastic at $1. Good B is untaxed.
(A)How much tax revenue is collected, and what is the excess burden of the $2 tax on A?
(B)How much revenue is collected if the tax on good A is reduced to $1 per unit and good B is taxe at $1 per unit?
(C)What is the total excess burden of taxing both goods at $1 per unit?
(D)Which tax system is preferable from the point of view of economic efficiency?

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Definitions:

Money Multiplier

The ratio of the change in the total money supply to the change in the monetary base, indicating how an initial deposit can lead to a greater final increase in the total money supply.

Reserve Banking

A banking system in which banks hold a fraction of their deposits as reserves, enabling them to meet withdrawal demands and extend credits.

Create Money

The process by which the central bank of a country (or other monetary authority) increases the money supply, often leading to the production of physical money or the creation of digital currency units.

Reserve Ratio

The fraction of depositors' balances that banks must have on hand as cash, a regulation enforced by central banking authorities.