In the market for widgets,the supply curve is the typical upward-sloping straight line,and the demand curve is the typical downward-sloping straight line.The equilibrium quantity in the market for widgets is 200 per month when there is no tax.Then a tax of $5 per widget is imposed.As a result,the government is able to raise $750 per month in tax revenue.We can conclude that the equilibrium quantity of widgets has fallen by
A) 25 per month.
B) 50 per month.
C) 75 per month.
D) 100 per month.

Question

Quizplus · Accepted Answer

When a tax of $5 per widget is imposed, the supply curve shifts upward by $5 vertically. As a result, the new equilibrium price increases by $2.50 ($5/2) per widget and the new equilibrium quantity decreases. The exact change in quantity depends on the elasticities of supply and demand, but we know that the government is able to raise $750 in tax revenue per month, which means that 150 widgets are being taxed ($750/$5). Therefore, the new equilibrium quantity is 200 - 150 = 50 widgets less than it was before the tax was imposed.

In the Market for Widgets,the Supply Curve Is the Typical