Question

1. Imagine that you work for the central bureaucracy and you need to raise revenue. You want to use a per-unit tax on some good. There are two possible goods. The current equilibrium price and quantity are the same for both goods. However, for good A, both the supply and demand are more elastic than for good B. The tax will be $1/unit regardless of which good you choose to tax. Which good will give you more revenue? Which one will be more efficient? Show this with two graphs. (You do NOT need to show the incidence on buyers and sellers to answer this question. These graphs should be pretty simple.....)

2. Country X has 100 units of labor. In country X it takes 10 units of labor to produce an airplane and 5 units of labor to produce a unit (whatever it is....) of coffee beans. Country Y has 200 units of labor. In country Y it takes 10 units of labor to produce an airplane and it takes 2 units of labor to produce a unit of coffee. Who has a comparative advantage in airplanes? Draw the PPF for these two countries combined. Label the slopes and intercepts.

Answer 1

Answer)

When both the demand and supply are elastic, then there is substantial decrease in demand and supply with the increase in the price levels.

On the other hand, when the demand and supply are inelastic, then there is comparatively less decrease in the demand and supply.

As, we can see in the below diagrams, that the shaded region in the tax revenue.

In case of elastic goods, there is less revenue collected due to the large decrease in the demand and supply for that good.

In case of inelastic goods, there is more revenue collected due to the less decrease in the demand and supply for the good.

So, we can say that taxing good B would be more efficient.

(i) Elastic demand and Supply

(ii) Inelastic demand and supply