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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 – Ps = t 300 – Q = 2Q + t Q* = 100 – t/3 Tax Revenue = t.Q = 100t – t2 / 3 For maximizing tax revenue, 100 – 2t/3 = 0 So, t = 150 Q* = 100 – 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 – P = P/2 P = 200 Which implies, Q = 100 DWL = ½ * 150* (100-50) = 3750

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