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    Question

    It is given that Qd = 300 - P, Qs = Q/2. Government

    imposes specific tax in such a way that it maximizes the total tax revenue. Then find out the DWL in such a situation.
    A 2050 Correct Answer Incorrect Answer
    B 3750 Correct Answer Incorrect Answer
    C 5000 Correct Answer Incorrect Answer
    D 7500 Correct Answer Incorrect Answer
    E 1000 Correct Answer Incorrect Answer

    Solution

    We know that when tax is imposed, Pd = Ps + t Pd тАУ Ps = t 300 тАУ Q = 2Q + t Q* = 100 тАУ t/3 Tax Revenue = t.Q = 100t тАУ t2 / 3 For maximizing tax revenue, 100 тАУ 2t/3 = 0 So, t = 150 Q* = 100 тАУ 50 = 50 Once you get that quantity, you can get DWL (area of triangle) But for that you also need to know the optimal quantity without tax. Equating demand and supply functions, 300 тАУ P = P/2 P = 200 Which implies, Q = 100 DWL = ┬╜ * 150* (100-50) = 3750

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