Question

Figure 8-19 The vertical distance between points A and B represents the original tax 151 152 253 354 35 Refer to Figure 3.19. If the government changed the per unit tax from $5.00 to $2.50, then the price paid by buyers would be 57.50, the price received by sellers would be 55, and the quantity sold in the market would be 1.units. Compared to the original tax rate this lower tax rate would increase poverment revenue and increase the deadweight loss from the tax increase government revenue and decrease the deadweight loss from the tax decrease government revenue and increase the deadweight loss from the tax decrease government revenue and decrease the deadweight loss from the tax

Answer 1

Option D is correct.

Government revenue when tax is $5, is the rectangle formed by points A, B, $4, $9. Therefore the revenue collect is l * b.

$5 * 1 = $5.  (original tax rate)

Government revenue when tax is $2.5, is the rectangle formed by points C, D, $5, $7.5. Therefore the revenue collect is l * b.

$2.5 * 1.5 = $3.75.   (lower tax rate)

Deadweight loss when tax is $5, the triangle formed (A, B, Intersection point) is 1/2 * b * h.

1/2 * $5 * 1 = $2.5.   (original tax rate)

Deadweight loss when tax is $2.5, the triangle formed (C, D, Intersection point) is 1/2 * b * h.

1/2 * $2.5 * 0.5 = $0.625.   (lower tax rate)