For this question, suppose the market for widgets is perfectly competitive and the government introduces a per-unit $1 tax on widgets. Post-tax, quantity of widgets sold in market equals 100. Which of the following is true?A. Reduction in producer surplus due to imposition of tax definitely equals 100 B. Reduction in producer surplus due to imposition of tax certainly equals 100 when the tax is collected from producers, but not when it is collected from consumers. C. Reduction in consumer surplus is definitely smaller than 100. D. Tax revenue is more than 100. E. None of the above.

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Asked Dec 9, 2019
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For this question, suppose the market for widgets is perfectly competitive and the government introduces a per-unit $1 tax on widgets. Post-tax, quantity of widgets sold in market equals 100. Which of the following is true?

A. Reduction in producer surplus due to imposition of tax definitely equals 100 

B. Reduction in producer surplus due to imposition of tax certainly equals 100 when the tax is collected from producers, but not when it is collected from consumers. 

C. Reduction in consumer surplus is definitely smaller than 100. 

D. Tax revenue is more than 100. 

E. None of the above. 

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Expert Answer

Step 1

If the market is competitive and government imposes a tax of $1 per unit, it is given that the post-tax quantity sold is 100.

Hence, the tax revenue earned is $100.

Step 2

Now, the tax revenue includes loss in consumer’s surplus, loss in producer’s surplus and dead weight lo...

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