Question

In: Economics

Suppose the government levies an excise tax on buyers of large-carat diamond rings. Before the tax,...

Suppose the government levies an excise tax on buyers of large-carat diamond rings. Before the tax, 4,500 rings were sold per year at an average price of $40,000. With the tax in effect, 2,500 rings are sold, buyers pay on average $40,500 per ring, and sellers receive $36,000 per ring.

a. In the scenario above, what is the amount of the tax per ring? ($)

b. In the scenario above, buyers pay:

c. In the scenario above, what is the deadweight loss caused by the tax? ($ million)

Solutions

Expert Solution

a) Tax = 40500-36000 = 4500

b) Buyers pay = 500 or (40500-40000)/4500*100 = 11.11% of total tax

c) DWL = 0.5*(4500-2500)*4500 = 4.5 million

Rahul Sunny answered 2 years ago
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