(Advanced analysis) The equations for the demand and supply curves for a particular product are P = 10 − 0.4Q and P = 2 + 0.4Q, where P is price and Q is quantity expressed in units of 100. After an excise tax is imposed on the product, the supply equation is P = 3 + 0.4Q. The efficiency loss of this tax is

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Quizplus · Accepted Answer

The efficiency loss (deadweight loss) is calculated as the area of the triangle formed between the new and old supply curves and the demand curve. The base of the triangle is the change in quantity (from 10 to 8.75), and the height is the tax amount (1). The area is 0.5 * base * height = 0.5 * 1.25 * 1 = $62.50.

(Advanced Analysis) the Equations for the Demand and Supply Curves