Question

Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping. If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax
a) increases by less than 50 percent and may even decline.
b) increases by exactly 50 percent.
c) increases by more than 50 percent.
d) The answer depends on whether supply or demand is more elastic.

Answer 1

Answer:

Explanation:

Deadweight loss of the tax is the amount by which the reduction in total surplus (consumer and producer) exceeds the total tax revenue.

It is given that 2 cent per egg tax is increased to 3 cents. Hence there is a 5% increase in tax ((3-2)/2 *100%). Deadweight loss from tax rises more rapidly than the size of the tax. Therefore, deadweight loss of the tax will increase by more than 50%. Option C is correct.