1. Please provide your solution, explanation and drawing for every single question, in the space provided under the question. 2. Please write clearly. If your answers are not readable, then it will have zero points. 3. Graphs: Please label the axes, lines, curves and areas correctly. Graphs with no labels will not receive any points.

Q4)Suppose the inverse demand curve for good M is given by the equation PM = 40 - 0.10*QM, and the supply curve is perfectly elastic (horizontal) at $4. Good M is presently taxed at $8 per unit. Good K (which is independent of good M) has an inverse demand curve, PK = 20 - 0.05*QK, and is also perfectly elastic at $2. Good K is untaxed.

a. How much tax revenue is collected and what is the excess burden of the $8 tax on M?

b. How much revenue is collected if the tax on good M is reduced to $4 per unit and good K is taxed at $4 per unit?

c. What is the total excess burden of taxing both goods at $4 per unit?

d. Which tax system is preferable from the point of view of economic efficiency?