Question

Macroeconomics

Posted 4 months ago

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Which of the following correctly identifies the areas of consumer surplus (CS), producer surplus (PS), tax revenue and deadweight loss (DWL) in this market after the tax?
A market with a tax on suppliers
Choose 1 answer:
(A)
$\begin{aligned}
\mathrm{CS} & =R \\
\mathrm{PS} & =U V \\
\mathrm{DWL} & =T \\
\operatorname{tax} & =S
\end{aligned}$
(B)
$\begin{aligned}
\mathrm{CS} & =R \\
\mathrm{PS} & =V \\
\mathrm{DWL} & =0 \\
\operatorname{tax} & =S U
\end{aligned}$
(c)
$\begin{aligned}
\mathrm{CS} & =R S T \\
\mathrm{PS} & =U W V \\
\mathrm{DWL} & =0 \\
\operatorname{tax} & =0
\end{aligned}$
(D)
$\begin{aligned}
\mathrm{CS} & =R S T \\
\mathrm{PS} & =U W V \\
\mathrm{DWL} & =T W \\
\operatorname{tax} & =0
\end{aligned}$
(E)
$\begin{aligned}
\mathrm{CS} & =R \\
\mathrm{PS} & =V \\
\mathrm{DWL} & =T W \\
\operatorname{tax} & =S U
\end{aligned}$
Related content
Taxation and dead weight loss
$9: 06$
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Answer from Sia

Posted 4 months ago

Solution

a

Identifying Consumer Surplus (CS): Consumer surplus is the area below the demand curve and above the price that consumers pay. After a tax is imposed, the price consumers pay is at point T. Therefore, the area representing CS is R

b

Identifying Producer Surplus (PS): Producer surplus is the area above the supply curve and below the price that producers receive. After a tax is imposed, the price producers receive is at point W. Therefore, the area representing PS is V

c

Identifying Tax Revenue: Tax revenue is the area between the price consumers pay and the price producers receive, multiplied by the quantity sold. This is represented by the rectangle between points T and W, which is the area S

d

Identifying Deadweight Loss (DWL): Deadweight loss is the loss of economic efficiency when the equilibrium outcome is not achievable due to market distortions, such as taxes. It is represented by the area of the triangle between the supply and demand curves and the quantity sold, which is the area T W

Answer

(E) CS = R, PS = V, DWL = T W, tax revenue = S U

Key Concept

Deadweight loss due to taxation

Explanation

Deadweight loss occurs when the tax imposed creates a gap between the price consumers pay and the price producers receive, leading to a reduction in the quantity traded and a loss of economic efficiency.

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