Question

Part 1 (1 point) D See Hint The supply of smart watches is linear and upward sloping, and the demand for smart watches is linear and downward sloping. Suppose the government imposes a tax of $3.00 per unit in the market for smart watches. In this market, the tax decreases consumer surplus by $1,500.00, and it decreases producer surplus by $3,000.00. The tax generates tax revenue of $3,000.00. The tax decreased the equilibrium quantity of the good by smart watches. Part 2 (2 points) ♡ See Hint The tax reduced the equilibrium quantity from to | smart watches.

Answer 1

Part 1

Decline in consumer surplus + Decline in producer surplus - Government revenue = Deadweight loss

1500 + 3000 - 3000 = 0.5 x tax size x reduction in quantity

1500 = 0.5 x 3 x reduction in quantity

reduction in quantity = 1000.

Hence, the tax reduces the equilibrium quantity by 1000 units

Part 2

Tax revenue = tax * quantity purchased

3000 = 3 x quantity purchased

quantity purchased = 1000 units

Also, tax reduces the equilibrium quantity by 1000 units

Hence, tax tax reduces the equilibrium quantity from 2000 units to 1000 units