Question

Suppose that the equilibrium quantity in the market for widgets has been 300 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 1000 per month in revenue from the tax. What is the deadweight loss from the tax? question 1 options: $250 $500 $100 $50

Answer 1

The deadweight loss from the tax imposed on widgets is $250, calculated by multiplying the reduction in quantity traded caused by the tax (100 widgets) by the average tax burden on buyers and sellers ($2.50).

Step-by-step explanation:

The question asks about the deadweight loss from a tax imposed on widgets. A tax of $5 per widget was imposed, causing the price paid by buyers to increase by $2 and the after-tax price received by sellers to fall by $3. It is given that the government raises $1000 per month in revenue from the tax. Given these conditions, we have to calculate the deadweight loss.

Deadweight loss occurs when the tax causes the quantity of the product traded to decrease. Before the tax was imposed, the equilibrium quantity was 300 per month. After the tax, the government collects $1000 in revenue, which would come from selling 200 widgets (since $1000 is the product of the tax per widget and the quantity sold, $5 x 200 = $1000). This indicates that the quantity has decreased to 200 widgets, a reduction of 100 widgets (300 - 200) from the equilibrium quantity.

To calculate the deadweight loss, we multiply the change in quantity by the average tax burden on buyers and sellers, which is ($2 + $3) / 2 = $2.50. The deadweight loss is therefore 100 widgets × $2.50, yielding a deadweight loss of $250.