Figure 8-6

-Refer to Figure 8-6.What is the amount of deadweight loss in this market resulting from the levying of the tax
A)$20
B)$30
C)$40
D)$50

Question

Figure 8-6
 
-Refer to Figure 8-6.What is the amount of deadweight loss in this market resulting from the levying of the tax
A)$20 
B)$30 
C)$40 
D)$50

Quizplus · Accepted Answer

To calculate the deadweight loss, we need to find the difference between the quantity transacted before and after the tax. Before the tax, quantity transacted was 80 units and the market price was $100. After the tax, the price paid by buyers increased to $110 and the quantity transacted decreased to 60 units.

As a result, deadweight loss can be calculated as the triangle formed by the intersection of the original supply and demand curves with the new demand curve ($110) and the new supply curve (which is the old supply curve shifted up by the amount of the tax, or by $10).

The area of the triangle is 1/2 base times height, or 1/2 x (20) x (100 - 80) = $400. Since deadweight loss is shared between buyers and sellers, we divide this by 2 to get $200. Therefore, the deadweight loss resulting from the tax is $200, which is closest to option C) $40.

Figure 8-6 -Refer to Figure 8-6.What Is the Amount of Deadweight Loss