Refer to the information provided in Table 19.5 below to answer the questions that follow.
Capital and labor each cost $1 per unit. The firm produces 1,000 units of output.
Table 19.5
$$\begin{array} { | c | c c | }
& \begin{array} { c }
\text { Input } \
\text { Requirements } \
\text { per unit of } \
\text { Output }
\end{array} \
\text { Technology } & K& L \
\hline \text { A } & 5 & 2 \
\hline \text { B } & 3 & 5 \
\hline
\end{array}$$
-Refer to Table 19.5. Suppose the government imposes a 100% tax on capital. What is the total tax revenue raised?

Question

Refer to the information provided in Table 19.5 below to answer the questions that follow.
Capital and labor each cost $1 per unit. The firm produces 1,000 units of output.
Table 19.5
 $$\begin{array} { | c | c c | } 
& \begin{array} { c } 
\text { Input } \
\text { Requirements } \
\text { per unit of } \
\text { Output }
\end{array} \
\text { Technology } & K& L \
\hline \text { A } & 5 & 2 \
\hline \text { B } & 3 & 5 \
\hline
\end{array}$$
-Refer to Table 19.5. Suppose the government imposes a 100% tax on capital. What is the total tax revenue raised?

Quizplus · Accepted Answer

When a 100% tax is imposed on capital, the cost of capital doubles to $2 per unit. As a result, the total production cost becomes $3,000 (1,000 units of output x [$2 for capital + $1 for labor]). This means that the firm needs to sell each unit at $3 to break even. However, with the demand curve given, the maximum price the firm can charge without a decrease in sales is $2. Therefore, the only option for the firm is to reduce production to 500 units to minimize losses. The government tax revenue is equal to the tax rate multiplied by the tax base, which is $1 per unit of capital. Thus, the total tax revenue raised is $1,000 (500 units of capital taxed at $1 per unit). Therefore, the correct answer is B.

Refer to the Information Provided in Table 19 -Refer to Table 19