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Assume the supply curve for cigars is a typical, upward-sloping straight line, and the demand curve for cigars is a typical, downward-sloping straight line. Suppose the equilibrium quantity in the market for cigars is 1,000 per month when there is no tax. Then a tax of $0.50 per cigar is imposed. The effective price paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40. The government's tax revenue amounts to $475 per month. Which of the following statements is correct? O The deadweight loss of the tax is $12.50. The demand for cigars is less elastic than the supply of cigars.O The tax causes a decrease in consumer surplus of $390 and a decrease in producer surplus of $97.50. All of the above are correct.

Answer :

Answer:

The correct answer is The deadweight loss of the tax is $12.50.

Explanation:

According to the scenario, the computation of the given data are as follows:

First we calculate the quantity sold after tax

So, Quantity sold after tax  = Tax revenue ÷ Tax  

Quantity sold after tax= $475 ÷ 0.50

= 950 units

Equilibrium quantity before tax = 1,000 units.

After tax, the price to buyers  increases from 1.50 to 1.90

And, the price which sellers receive decrease from 1.50 to 1.40.

So, we can calculate the dead weight loss by using following formula:

Dead weight loss= 1/2 × Change to buyers × Change to sellers

=0.5 × (1.90 - 1.40)×( $1000 - $950)

=0.5 × 0.50 × $50

=$12.50

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