Suppose the market demand for cigarettes is: D=10- P, and the supply of cigarettes is: S=- 2+P, where P is the price per pack of cigarettes. If the government imposes a cigarette tax of $1 per pack, the deadweight loss is:
A)$0.
B)$0.25.
C)$1.
D)$0.5.

Question

Quizplus · Accepted Answer

The deadweight loss from a tax is calculated as the loss in consumer and producer surplus that is not offset by tax revenue. Here, the tax shifts the supply curve leftward (or upward in terms of price), effectively making the new supply equation S = -2 + (P + 1). To find the new equilibrium, set D = S: 10 - P = -2 + P + 1. Solving for P gives P = 5.5 before the tax, and the quantity is 4.5. After the tax, the price consumers pay would be higher, but for simplicity, we calculate the deadweight loss using the change in quantity. The tax reduces the quantity traded from 5 to 4.5, a reduction of 0.5. The area of the triangle that represents the deadweight loss is 0.5 * 1 * 0.5 = 0.25, where 0.5 is the base (the reduction in quantity) and 1 is the height (the tax), making the area (and thus the deadweight loss) $0.25.

Suppose the Market Demand for Cigarettes Is: D=10- P, and the Supply