Assume the supply curve for cigars is a typical,upward-sloping straight line,and the demand curve for cigars is a typical,downward-sloping straight line.Suppose the equilibrium quantity in the market for cigars is 1,000 per month when there is no tax.Then a tax of $0.50 per cigar is imposed.The effective price paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40.The government's tax revenue amounts to $475 per month.Which of the following statements is correct?
A)The demand for cigars is less elastic than the supply of cigars.
B)The tax causes a decrease in consumer surplus of $390 and a decrease in producer surplus of $97.50.
C)The deadweight loss of the tax is $12.50.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

A) The statement can be inferred from the fact that the effective price paid by buyers increased by $0.40 while the effective price received by sellers only decreased by $0.10, indicating that buyers are less responsive to a change in price than sellers.
B) The decrease in consumer surplus can be calculated by finding the area of the triangle formed by the original demand curve, the new demand curve, and the new effective price paid by buyers. The decrease in producer surplus can be calculated by finding the area of the triangle formed by the original supply curve, the new supply curve, and the new effective price received by sellers. Substituting the values given, we get a decrease in consumer surplus of $390 and a decrease in producer surplus of $97.50.
C) The deadweight loss can be calculated by finding the difference in quantity between the equilibrium quantity before the tax and the equilibrium quantity after the tax. Substituting the values given, we get a deadweight loss of $12.50.

Assume the Supply Curve for Cigars Is a Typical,upward-Sloping Straight