Reference: Ref 6-7 (Figure: Commodity Tax on Suppliers) Refer to the figure. If a tax shifts the supply curve from S1 to S2, the value of deadweight loss is:
A) $200.
B) $100.
C) $50.
D) $25.

Question

Reference: Ref 6-7 (Figure: Commodity Tax on Suppliers) Refer to the figure. If a tax shifts the supply curve from S1 to S2, the value of deadweight loss is:
A) $200. 
B) $100. 
C) $50. 
D) $25.

Quizplus · Accepted Answer

The deadweight loss is the triangle formed by the intersection of the original supply curve (S1) and demand curve (D) and the new supply curve (S2) and the same demand curve (D). The height of this triangle is the difference in price between the pre-tax equilibrium point and the post-tax equilibrium point ($5 in this case). The base of the triangle is the difference in quantity demanded between the pre-tax equilibrium point and the post-tax equilibrium point (20 units in this case). Therefore, the area of the deadweight loss triangle is equal to ($5 x 20 units) / 2 = $50.

Reference: Ref 6-7 (Figure: Commodity Tax on Suppliers) Refer to the Figure