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Linear compensated demand curve

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1. Another friend, who happens to be a history major, sees the formula for excess burden under a linear compensated demand curve and remarks: In the formula for excess burden, the tax rate is less than one. When it is squared, the result is smaller, not bigger. Thus, having t2 instead of t in the formula makes the size of the tax less important.

a. Comment on this insight by your friend.

b. What does having t2 instead of t in the formula imply for the size of the tax base, compared to the tax rate, all else the same? equal?

Reference no: EM131474878

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