Question

A tax of $0.25 is imposed on each bag of potato chips that is sold. The tax decreases producer surplus by $600 per day, generates tax revenue of $1,220 per day, and decreases the equilibrium quantity of potato chips by 120 bags per day. The tax a. decreases total surplus from $3,000 to $1,800 per day. b. decreases the equilibrium quantity from 6,000 bags per day to 5,880 bags per day. c. creates a deadweight loss of $15 per day. d. decreases consumer surplus by $645 per day.

Answer 1

The tax create a deadweight loss of $15 per day.

What is tax revenue?

A tax revenue means the sum derived from tax payers.

Dead weight loss = 0.5 * (P2 - P1) * (Q1 - Q2)

Dead weight loss = 0.5 * 0.25 * 120

Dead weight loss = $15

Hence, the tax creates a deadweight loss of $15 per day.

Therefore, the Option C is correct.

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