Suppose a tax is imposed on each new hearing aid that is sold. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. As a result of the tax, the equilibrium quantity of hearing aids decreases from 10,000 to 9,000, and the deadweight loss of the tax is $60,000. We can conclude that the tax on each hearing aid is
A)$60.
B)$120.
C)$160.
D)$200.

Question

Quizplus · Accepted Answer

The deadweight loss (DWL) of a tax is calculated as the area of the triangle formed by the tax-induced price increase on the supply and demand curves. This area can be found using the formula for the area of a triangle: $ \frac{1}{2} \times \text{base} \times \text{height} $, where the base is the change in quantity (1,000 hearing aids, from 10,000 to 9,000) and the height is the tax per unit. Given that the DWL is $60,000, we can set up the equation $ \frac{1}{2} \times 1,000 \times \text{tax} = 60,000 $. Solving for the tax gives us $120 per hearing aid.

Suppose a Tax Is Imposed on Each New Hearing Aid