Figure 8-3
The vertical distance between points A and C represents a tax in the market.
-Refer to Figure 8-3.Which of the following equations is valid for the deadweight loss of the tax?
A)Deadweight loss = (1/2)(P2 - P1)(Q2 + Q1)
B)Deadweight loss = (1/2)(P3 - P1)(Q2 + Q1)
C)Deadweight loss = (1/2)(P3 - P2)(Q2 - Q1)
D)Deadweight loss = (1/2)(P3 - P1)(Q2 - Q1)

Question

Figure 8-3
The vertical distance between points A and C represents a tax in the market. 
-Refer to Figure 8-3.Which of the following equations is valid for the deadweight loss of the tax?
A)Deadweight loss = (1/2)(P2 - P1)(Q2 + Q1) 
B)Deadweight loss = (1/2)(P3 - P1)(Q2 + Q1) 
C)Deadweight loss = (1/2)(P3 - P2)(Q2 - Q1) 
D)Deadweight loss = (1/2)(P3 - P1)(Q2 - Q1)

Quizplus · Accepted Answer

Deadweight loss is the loss of economic efficiency caused by a market inefficiency, such as a tax. In this case, the deadweight loss is represented by the triangle between the original equilibrium point (Q1, P1), the point where the demand curve intersects the new supply curve after the tax (Q2, P3), and the point where the supply curve intersects the new demand curve after the tax (Q2, P2). The formula to calculate the area of a triangle is 1/2(base x height), so the valid equation for the deadweight loss of the tax is (1/2)(P3 - P1)(Q2 - Q1). Therefore, option D is the correct answer.

Figure 8-3 the Vertical Distance Between Points a and C Represents a Represents