Suppose there is only one movie theatre in a town and the equilibrium price and quantity for movie admissions is $9 and 850 visits per week.Now suppose the government imposes a tax of $2 per movie admission and that the new equilibrium price and quantity are $10.50 and 780 visits per week.What is the weekly excess burden of this tax?
A)$0
B)$2
C)$70
D)$1560
E)$1700

Question

Quizplus · Accepted Answer

To calculate the excess burden of the tax, we first need to find the new quantity demanded at the new equilibrium price of $10.50. Using the original demand equation, we can find that quantity demanded decreases from 850 visits to 780 visits:

Qd = 1200 - 50P
Qd = 1200 - 50(10.5)
Qd = 780

Next, we need to calculate the deadweight loss, which is the difference between the original quantity and the new quantity (850 - 780 = 70).

The excess burden of the tax is then equal to the deadweight loss multiplied by the tax rate ($2):

Excess burden = Deadweight loss x Tax rate
Excess burden = 70 x $2
Excess burden = $140

Therefore, the weekly excess burden of this tax is $70.

Suppose There Is Only One Movie Theatre in a Town