Suppose that the equilibrium quantity in the market for widgets has been 200 per

Question

Suppose that the equilibrium quantity in the market for widgets has been 200 per month. Then a tax of $5 per widget is imposed. The price paid by buyers increases by $2 and the after-tax price received by sellers falls by $3. The government is able to raise $750 per month in revenue from the tax. What is the deadweight loss from the tax?
a. $50
b. $75
c. $125
d. $250

Figurc 9-11 Price of Carnations $14 12 10 Domestic Supply Tariff World Price Domestic Demand 100 200 300 400 00 600 Quantity of Carnations (in dozens) Refer t igure 9-1. Whal w happen in this mrk ih fre trade? a. The domestic price will cqu the world pricc b. Carnations will be sold at $8 in this market c. There will be a shortage of 400 carnations in this market. d. There will be a surplus of 400 carmations in this market.

Explanation / Answer

Fig 9-11. Option d. Under free trade the price would be $4 for which the domestic supplies would be 100 and another 400 would be imported

Fig 9-6. Option a. It is at point where $5 intersects with supply curve and quantity

Deadweight loss = 0.5*Change in quantity*tax

Change in quantity = Old quantity - New quantity

= 200- (revenues/tax) = 200-(750/5)= 50

So, deadweight loss = 0.5*50*5= 125

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