Asked by Blair Harrell on Jul 20, 2024
Verified
Suppose a tax is imposed on each new hearing aid that is sold. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. As a result of the tax, the equilibrium quantity of hearing aids decreases from 10,000 to 9,000, and the deadweight loss of the tax is $60,000. We can conclude that the tax on each hearing aid is
A) $60.
B) $120.
C) $160.
D) $200.
Deadweight Loss
An economic inefficiency occurring when there is an imbalance between supply and demand leading to a loss of economic value, often caused by government interventions like taxes or subsidies.
Equilibrium Quantity
The amount of products or services available and sought after at the market's balance price.
Supply Curve
A graphical representation that shows the relationship between the price of a good and the quantity of the good that producers are willing to supply.
- Detect and calculate the deadweight loss triggered by a tax.
- Understand the correlation between the magnitude of a tax and the consequent deadweight loss it incurs.
Verified Answer
MR
marissa rodriguezJul 27, 2024
Final Answer :
B
Explanation :
The deadweight loss (DWL) of a tax is calculated as the area of the triangle formed by the tax-induced price increase on the supply and demand curves. This area can be found using the formula for the area of a triangle: 12×base×height \frac{1}{2} \times \text{base} \times \text{height} 21×base×height , where the base is the change in quantity (1,000 hearing aids, from 10,000 to 9,000) and the height is the tax per unit. Given that the DWL is $60,000, we can set up the equation 12×1,000×tax=60,000 \frac{1}{2} \times 1,000 \times \text{tax} = 60,000 21×1,000×tax=60,000 . Solving for the tax gives us $120 per hearing aid.
Learning Objectives
- Detect and calculate the deadweight loss triggered by a tax.
- Understand the correlation between the magnitude of a tax and the consequent deadweight loss it incurs.