Principles of Economics (Second Edition)
2nd Edition
ISBN: 9780393614077
Author: coppock, Lee; Mateer, Dirk
Publisher: W. W. Norton & Company
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Chapter 29, Problem 6QFR
To determine
To explain:
The whole concept of Laffer curve.
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What is the Laffer curve. Graphically show how to increase the tax revenue.
The graph below shows the Laffer Curve,
Using the point drawing tool, identify a tax rate/tax revenue combination such
that tax rates can be reduced without reducing tax revenues. Label your new
point 'T,'
Carefully follow the instructions above, and only draw the required object.
Tax Rate
Tax Revenues
Which of the following statements is correct?
A decrease in the size of a tax always decreases the tax revenue raised by that tax.
A decrease in the size of a tax always decreases the deadweight loss of that tax.
Tax revenue decreases when there is a small decrease in the tax rate and the economy is on the downward-sloping part of the Laffer curve.
An increase in the size of a tax leads to an increase in the deadweight loss of the tax only if the economy is on the upward-sloping part of the Laffer curve.
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Principles of Economics (Second Edition)
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- 1) Suppose the figure represents the Laffer Curve for income taxes on high-income earners. If the tax rate on high-income earners is 55% a) marginal tax revenue will increase if tax rates are increased. b) marginal tax revenue is negative. c) the tax rate is optimal. d) marginal tax revenue is positive. 2) Suppose the figure represents the Laffer Curve for income taxes on high-income earners. Which of the following best explains the shape of the Laffer Curve? a) As tax rates rise, individuals work the same amount but conceal more income from tax authorities. b) As tax rates rise, individuals work the same amount and the same amount of income is available to tax. c) As tax rates rise, individuals work more and more income is available to tax. d) As tax rates rise, individuals work less and less income is available to taxarrow_forwardK During the 1980s, the controversial economist Arthur Laffer promoted the idea that tax increases lead to a reduction in government revenue. Called supply-side economics, the theory uses functions such as f(x) = - -, 30 ≤x≤ 100. This function models the government tax revenue, f(x), in tens of billions of dollars, in terms of the tax rate, x. The graph of the function is shown. It illustrates tax revenue decreasing quite dramatically as the tax rate increases. At a tax ate of (gasp) 100%, the government takes all our money and no one has an incentive to work. With no income earned, zero dollars in tax revenue is generated. Complete parts (a) through (c) below. 110x-11,000 x-140 a. Find f(30). f(30) = (Round to the nearest integer as needed.) Tax Revenue 80- 40- 0- 0 50 Tax Rate 100arrow_forwardMiller wants to discourage energy drink purchase, so he's considering a $1 tax or $2 tax on the drink. 1. Is Sen. Miller's plan for a two dollar tax better at stopping consumers from purchasing energy drinks? Why or why not? Incorporate your knowledge of the Laffer Curve in your response.arrow_forward
- TRUE/FALSE According to the Laffer curve, increases in tax rates always result in less tax revenue.arrow_forwardEconomist Arthur lagger famously pointed out that, in some cases, income tax revenue can actually go up when tax rates go down. Why might this be the case?arrow_forwardSuppose the following list of events describes all of the economic activity resulting from an increase in government spending. Suppose that at each step after the initial one, the marginal propensity to consume is 0.62 and the tax rate is 8%. Step 0. The government spends $8500 on meat to host a very large dinner for foreign diplomats. Step A. The butcher takes the income earned by selling the meat, saves some, and spends the rest on a wedding cake for his daughter. Step B. The baker who produced the wedding cake saves some of her earnings and uses the rest to purchase beautiful candlesticks as gifts for all of her friends. Step C. The local candlestick maker saves some of his revenue for retirement and spends the rest on building materials to improve his house. Instructions: Modify the settings in the interactive tool to represent this event. Then click "Spending Rounds" and use the table to answer the following questions. Round answers to the nearest cent, if necessary. How much does…arrow_forward
- - Most economists have reached the following conclusion about supply-side economics. Supply-side tax cuts are likely to reduce income inequality. Supply-side tax cuts are almost certain to lead to smaller budget deficits. Supply-side tax cuts are likely to widen income inequality. None of these.arrow_forwardUsing the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy. PRICE LEVEL 130 20 120 110 100 90 80 Aggregate Demand 70 + + 0 10 20 30 OUTPUT 40 50 60 Aggregate Demand ? Suppose the governments of two very similar economies, economy Y and economy Z, implement a permanent tax cut of equal size. The marginal propensity to consume (MPC) in economy Y is 0.85 and the MPC in economy Z is 0.8. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with thearrow_forward9. Ch.16: Graph the Laffer Curve. Suppose a nation collects taxes as a percent of income. The point on the graph below indicates the current tax rate on the horizontal axis, which runs from 0% on the left to 100% on the right. The vertical axis gives the government's tax revenue. Draw the nation's Laffer curve. i. ii. Suppose we are at the dot shown on the graph. Could we increase the tax rate and generate additional government revenue Tax revenue Rmax Tax rate (percent of income)arrow_forward
- Refer to the Laffer curve below. Which of the following is true? A) At A there will be a budget surplus, but at B there will be a budget deficit. B) At A tax rates are higher than at B, but tax revenue collected are the same. C) At B tax rates are higher than at A, but the tax revenues collected are the same. Tax Revenue 0 Tax Rate (Percent) B 100arrow_forwardSuppose the equation for the demand curve for some product X is P = 8 − 0.6Q and the supply curve is P = 2 + 0.4Q. What are the equilibrium price and quantity? Now suppose an excise tax is imposed on X such that the new supply equation is P = 4 + 0.4Q. How much tax revenue will this excise tax yield the government? Graph the curves, and label the area of the graph that represents the tax collection “TC” and the area that represents the efficiency loss of the tax “EL.” Briefly explain why area EL is the efficiency loss of the tax but TC is not.arrow_forwardexplain step by step, how is it like to graph?arrow_forward
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