Question

2. Suppose there are two goods—good 1 and good 2. Demand curves are the same across goods, but marginal cost of producing good 1 is smaller than that of good 2. Assume both producers and consumers are price takers. Now suppose government levies tax on these goods. Assuming that tax rate being the same, which good gives higher revenue to the government? Try to solve with general marginal costs

Answer 1

Since the market is perfect competation the hence the firm cn not influence the price of the goods now under such situation imposing the tax on good 1 and good 2results increasing the cost of the production more.

Since MC is of the good 1 is less compare good 2 before tax when government imposes the tax on both goods, good 1 gives higher tax than the goods 2 because the price of the good 1 equals o good 2 before tax and good 2 prices again further increased.

The government makes revenue from the good 1.