Question

For widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $15 per unit is imposed on widgets. The tax reduces the equilibrium quantity in the market by 300 units. The deadweight loss from the tax is
a. $1,750.
b. $2,250.
c. $3,000.
d. $4,500.

Answer 1

Answer:

b. $2,250.

Explanation:

In order to calculate deadweight loss, you need to know the change in price and the change in quantity demanded.

Given:

Tax, t = $15 per unit

Equilibrium quantity in the market, (Qo - Q1) = 300 units.

Deadweight loss, x = 1/2 × (P2 - P1) × (Qo - Q1)

Where,

(Qo - Q1) = change in supply

(P2 - P1) = change in prices due to imposition of tax

= 1/2 × t × (Qo - Q1)

= 1/2 × 15 × 300

= $ 2250

Answer 2

Answer:

B. $2,250

Explanation:

Given

Tax = $15

Equilibrium quantity = 300

Therefore,

Deadweight loss from tax = (300 × 15) ÷ 2

= 4500 ÷ 2

= $2,250