Question

Suppose the government imposes a $4-per-pack tax on suppliers. At this tax amount, the equilibrium quantity of cigarettes is packs, and the government collects in tax revenue. Now calculate the government's tax revenue if it sets a tax of $0, $4, $8, $10, 12, $16, or $20 per pack. (Hint: To find the equlibrium quantity after the tax, adjust the "Quantity" held until the Tax equals the value of the per-unit tax.) Using the data you generate, plot a Laffer curve by using the green points (triangle symbol) to plot total tax revenue at each of those tax levels. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically

Answer 1

1. Set the tax rate to 0.

2. In the "Quantity" column, adjust the value until the "Tax" column equals the value of the per-unit tax. In this case, the equilibrium quantity is 100 packs.

3. Calculate the government's tax revenue by multiplying the tax rate by the equilibrium quantity. In this case, the government's tax revenue is $0.

4. Repeat steps 2 and 3 for the other tax rates.

Here is the table of results:

Tax Rate | Equilibrium Quantity | Government Tax Revenue

0 | 100 | 0

4 | 80 | 320

8 | 60 | 480

10 | 40 | 400

12 | 20 | 240

16 | 0 | 0

20 | 0 | 0

The Laffer curve shows that the government's tax revenue increases as the tax rate increases, up to a point. After that point, the tax rate becomes so high that it discourages people from working or investing, and the government's tax revenue starts to decrease. The exact point at which the Laffer curve peaks is unknown, and it is likely different for different types of taxes.