Suppose the government can impose taxes on only two goods, X and Y. The compensated demand curve for X is Qx = 60 - 10Px and the compensated demand curve for Y is Qy = 60 - 20Py. The supply curve of each goods is perfectly elastic at a price of $1.
a) What should be the ratio of ad valorem tax rates, tx/ty , at the optimum?
b. Calculate the tax optimal tax rates if the government must raise $50 in revenues. You can use the compensated demand curves as also representing the normal demand curves in this question (i.e. no income effects are present)