Question

Question 24 The equilibrium quantity in the market for Apple watches has been 750 per month. Then a tax of $7 per watch is imposed. The price paid by buyers increases by $5.50 and the after-tax price received by sellers falls by $1.50. The government is able to raise $4480 per month in revenue from the tax. a) What is the deadweight loss from the tax? a. $500 b. $385 C. $270 d. $400 b) Which is more elastic - demand or supply? a. Not enough information to determine b. Supply c. Both have the same elasticity d. Demand

Answer 1

A) Deadweight loss = (1/2) * (equilibrium quantity - after tax quantity) * tax amount

Government tax revenue = tax amount * after tax quantity

Or, after tax quantity = $4480/$7 = 640

Therefore, deadweight loss = (1/2)*(750 - 640)*7 = $385

Answer: option B

B) When a tax is imposed on a market, both buyers and sellers will bear the tax burden. But on which side the burden will fall heavily depends on the elasticity. The less elastic a side is, the more will be the tax burden on that side.

After the tax is imposed, buyers pay most of the tax. It means demand is less elastic than supply.

Answer: option B