Suppose a tax of $5 per unit is imposed on a good.The supply curve is a typical upward-sloping straight line,and the demand curve is a typical downward-sloping straight line.The tax decreases consumer surplus by $10,000 and decreases producer surplus by $15,000.The deadweight loss of the tax is $2,500.The tax decreased the equilibrium quantity of the good from
A)6,500 to 5,500.
B)5,500 to 4,500.
C)5,000 to 3,000.
D)6,000 to 4,000.

Question

Quizplus · Accepted Answer

The decrease in consumer surplus ($10,000) plus the decrease in producer surplus ($15,000) equals the total revenue collected by the tax ($25,000). The deadweight loss is a loss of surplus that is not collected by the government as revenue, which is $2,500. Therefore, the total surplus loss is $27,500. Since the tax is $5 per unit, the quantity of the good must have decreased by 5,500 units (=$27,500/$5). Thus, the equilibrium quantity of the good decreased from 5,500 to 4,500.

Suppose a Tax of $5 Per Unit Is Imposed on a Good.The