Question

Suppose a tax is imposed on each new hearing aid that is sold. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. As a result of the tax, the equilibrium quantity of hearing aids decreases from 10,000 to 9,000, and the deadweight loss of the tax is $60,000. We can conclude that the tax on each hearing aid is a. $60. b. $120. c. $200. d. $160.

Answer 1

B) $120.

Step-by-step explanation:

the deadweight loss is equal to the total economic loss = $60,000

and the total economic loss = 1/2 x decrease in quantity sold x tax (since the deadweight loss is a triangle, the formula is 1/2 x base x height), so:

1/2 x decrease in quantity sold x tax = deadweight loss

1/2 x 1,000 x tax = $60,000

tax = $60,000 / 500 = $120