Suppose Darby values a certain smart phone at $400. Jake values the same smart phone at $300. The pre-tax price of this smart phone is $250. The government imposes a tax of $75 on each smart phone, and the price rises to $325. The deadweight loss from the tax is

Question

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The deadweight loss from a tax is the reduction in economic efficiency resulting from the tax. In this case, the pre-tax price for the smart phone is $250, which means that at that price, both Darby and Jake are willing to buy the phone. Once the tax of $75 is imposed, the price increases to $325, which means that Jake is no longer willing to buy the phone, as his valuation is only $300. This results in a deadweight loss of $100, which is the difference between what Jake was willing to pay ($300) and what the phone actually costs ($325), multiplied by the reduced quantity of phones sold (1, since Jake no longer buys one). Therefore, the answer is C) $100.

Suppose Darby Values a Certain Smart Phone at $400