Question

Suppose that in the market for widgets, the supply curve is the typical upward-sloping line, and the demand curve is the typical downward-sloping line. A tax of $7.00 per unit is imposed on widgets and the price rises by $4.75. The equilibrium quantity before the tax imposition was 360,000 widgets and the equilibrium quantity after the tax is 347,500 widgets. The deadweight loss from the tax is
A. less than $42,000
B. more than $42,000 but less than $43,550
C. more than $43,550 but less than $44,775
D. more than $44,775 but less than $46,050
E. more than $46,050

According to the textbook, a tax placed on buyers of airline tickets shifts the
A. supply curve for airline tickets upward, decreasing the effective price paid by buyers of airline tickets and causing the quantity of airline tickets to increase.
B. supply curve for airline tickets upward, increasing the effective price paid by buyers of airline tickets and causing the quantity of airline tickets to decrease.
C. demand curve for airline tickets downward, decreasing the price received by sellers of airline tickets and causing the quantity of airline tickets to increase.
D. demand curve for airline tickets upward, increasing the price received by sellers of airline tickets and causing the quantity of airline tickets to increase.
E. demand curve for airline tickets downward, decreasing the price received by sellers of airline tickets and causing the quantity of airline tickets to decrease.

Suppose that the equilibrium quantity in the market for gadgets has been 62,500 per month. Then a tax of $8 per gadget is imposed on gadgets. As a result, the price paid by buyers increases by $5 and the after-tax price received (and kept) by sellers falls by $3. Given this tax imposition, the government is able to raise $457,600 per month in tax revenue. We can conclude that the imposition of the tax
(x) has reduced the equilibrium quantity of gadgets by more than 5,250 but less than 5,375 gadgets per month.
(y) has caused a deadweight loss by an amount more than $20,750 but less than $22,500 per month.
(z) has reduced consumer surplus by more than $298,250 per month and has reduced producer surplus by more than $178,775 per month.
A. (x), (y) and (z) B. (x) and (y), only
C. (x) and (z), only D. (y) and (z), only
E. (y) only

Answer 1

Sol to Ques 1:

See the figure below which illustrates the situation:

Assuming demand and supply curves are linear for this approximation.

Demand and supply curves were intersecting at the equilibrium quantity of 360,000. With imposition of taxes, consumers will pay additional 4.75$ while the consumer will only receive original price - 2.75$ and the new quantity would be 347,500 units. The area above the new price point and below the demand curve will be the new consumer surplus. The area below the producer price and above the supply curve will be the producer surplus and the area in between will be government's tax revenue. The shaded area will be the deadweight loss.

To calculate the shaded area:

assume it is a triangle with base of 7$ and height of (360,000 - 347,500).

Area of triangle = 0.5*base*height = 0.5*7*(360,000 - 347,500) = 43,750 (Approx) - answer C