Suppose that the equilibrium quantity in the market for widg

Suppose that the equilibrium quantity in the market for widgets has been 200 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 $750 per month in revenue from the tax. What is the deadweight loss from the tax?
a. $50
b. $75
c. $125
d. $250

Figurc 9-11 Price of Carnations $14 12 10 Domestic Supply Tariff World Price Domestic Demand 100 200 300 400 00 600 Quantity of Carnations (in dozens) Refer t igure 9-1. Whal w happen in this mrk ih fre trade? a. The domestic price will cqu the world pricc b. Carnations will be sold at $8 in this market c. There will be a shortage of 400 carnations in this market. d. There will be a surplus of 400 carmations in this market.

Solution

Fig 9-11. Option d. Under free trade the price would be $4 for which the domestic supplies would be 100 and another 400 would be imported

Fig 9-6. Option a. It is at point where $5 intersects with supply curve and quantity

Deadweight loss = 0.5*Change in quantity*tax

Change in quantity = Old quantity - New quantity

= 200- (revenues/tax) = 200-(750/5)= 50

So, deadweight loss = 0.5*50*5= 125