Question

5) (THIS QUESTION IS WORTH 10 POINTS) Refer to the following figure. What is the amount of the tax that was imposed? How much deadweight loss did the tax create? Which side of the market is more elastic and how do you know (note, graphs is not necessarily drawn to scale, use the numbers)? How much revenue will be collected by the government? Demand 80 100 120
please fully explain how you got the answer im so confused on this concept

Answer 1

(a) Amount of tax = Vertical distance between the supply curves = 12 - 9 = 3

(b) Pre-tax quantity is 100 and after-tax quantity is 80.

Deadweight loss = (1/2) x Tax per unit x Change in quantity = (1/2) x 3 x (100 - 80) = 1.5 x 20 = 30

(c) After tax, price paid by buyers = 12 and price received by sellers = 9, with pre-tax price being 10.

Tax burden on buyers = Price paid by buyers - Pre-tax price = 12 - 10 = 2

Tax burden on sellers = Pre-tax price - price received by sellers = 10 - 9 = 1

So, buyers bear higher tax burden.

(d) Tax revenue = Tax per unit x Quantity after tax = 3 x 80 = 240