Question

With linear demand and supply curves in a market, suppose a tax of $0.20 per unit on a good creates a deadweight loss of $40. If the tax is increased to $0.50 per unit, the deadweight loss from the new tax will be_____.

Answer 1

$250

Step-by-step explanation:

Deadweight loss can be defined as the losses society experiences due to taxes and price control.

There are three main causes of deadweight loss;

(1). Taxes: taxes are extra charges from government. These charges adds to the selling prices of goods or service.

(2). Price ceilings: in other to prohibits sellers from from charging more than a particular price for goods and services, prices ceilings then, are used to control prices. Price ceilings are set by

government.

(3).Price floors: for sellers not to charge less than a certain amount for goods or services, price floors are used to control this.

Deadweight Loss= 0.5× (Pn − Po) × (Qo − Qn).

Hence, 0.5×.5= 0.25.

0.25× 40/.2= 50.

Therefore, 40/.2= 200.

Then,200+50= $250.

Where; The original price of the product = (Po), the quantity originally requested of the product= (Qo), the new quantities of the product requested after taxes, price ceiling and/or price floor = (Qn), and the new price for the product once taxes after price ceiling and/or price floor = (Pn).