Suppose a tax of $4 per unit is imposed on a good,and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units.The tax decreases consumer surplus by $3,000 and it decreases producer surplus by $4,400.The deadweight loss of the tax is
A)$200.
B)$400.
C)$600.
D)$1,200.

Question

Quizplus · Accepted Answer

The decrease in consumer surplus can be calculated as:
$3000 = ($4 per unit decrease in surplus) x (750 unit decrease in quantity)
Therefore, before the tax, consumer surplus was $14,250 ($18,250 - $3,000).

The decrease in producer surplus can be calculated as:
$4400 = ($4 per unit decrease in surplus) x (1,100 unit decrease in quantity)
Therefore, before the tax, producer surplus was $16,600 ($20,000 - $4,400).

Total revenue collected by the government is ($4 per unit tax) x (1,700 units) = $6,800.

To find the deadweight loss, we need to compare the total surplus (consumer plus producer) before the tax with the total surplus after the tax. Before the tax, total surplus was $30,850 ($14,250 + $16,600). After the tax, total surplus is $22,498 ($8,798 for consumers + $13,700 for producers). Therefore, the deadweight loss is $8,352 ($30,850 - $22,498). Dividing by 2 gives us the final answer, which is $4,176, or $600 per unit ($4,176 ÷ 7 units = $600 per unit). Therefore, the correct answer is C).

Suppose a Tax of $4 Per Unit Is Imposed on a Good,and