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?
a. The demand for cigars is less elastic than the supply of cigars.
b. The tax causes a decrease in consumer surplus of $390 and a decrease in producer surplus of $97.50.
c. The deadweight loss of the tax is $12.50.
d. All of the above are correct.
d
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