Suppose a tax of $0.10 per unit on a good creates a deadweight loss of $100.If the tax is increased to $0.25 per unit,the deadweight loss from the new tax would be
A)$200.
B)$250.
C)$475.
D)$625.

Question

Quizplus · Accepted Answer

The deadweight loss from a tax increases with the square of the tax rate. If the tax increases from $0.10 to $0.25, the tax rate increases by 2.5 times. Therefore, the deadweight loss increases by (2.5)^2 = 6.25 times. So, the new deadweight loss is 6.25 * $100 = $625.

Suppose a Tax of $0