Question

In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 250 per month when there is no tax. Then a tax of $6 per widget is imposed. As a result, the government is able to raise $750 per month in tax revenue. We can conclude that the after-tax quantity of widgets has fallen by

a. 25 per month.

b. 50 per month.

c. 75 per month.

d. 100 per month.

Answer 1

The after-tax quantity of widgets has fallen by 125 per month

Step-by-step explanation:

Equilibrium quantity when there was no tax = 250

Now with a tax of $6, the revenue generated based on the equilibrium quantity is 250 * 6 = $1,500

The government was able to raise only $750 out of the supposed $1500 it should generate from taxing the quantity of widgets sold.

Thus, the loss in Government revenue = $1500-$750 = $750

Thus, the quantity lost is exactly half of what we have as the equilibrium quantity i.e 750/6 = 125

Hence, we can conclude that the after-tax quantity of widgets has fallen by 125 per month