Question

On a given market, the demand is given by the formula P = 100-Q, and the supply with the formula P = 20. What is the maximum amount of unit tax revenue that can be collected on this market?
a) 3200
b) 1600
c) None of the other answers is correct
d) 2500
e) There is too little data to answer.

Answer 1

Option b

$1600

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the market is in equilibrium where the two curves intersect

100-Q=20

Q=80

and per unit tax will increase the supply curve by tax amount

P=20, tax=5 then P=25 and tax =10 then P=30 and so on

then the equilibrium is quantity after tax is

Q=100-P-tax

tax revenue =tax rate *Q

when

tax =$40

Q=100-20-40=40

tax revenue =40*40

=$1600

the Laffer curve shows the tax on the x-axis and the tax revenue on the y-axis

the maximum tax revenue is at Q=40 and tax =40