Question

Using the information from Deadweight Loss from Wireless Taxes

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draw graphs to illustrate why the tax on landlines creates no deadweight loss while the tax on cell phones creates a more substantial deadweight loss.

​1.) Use the line drawing tool to draw the demand for landline minutes. Label this line​ 'landline'.

​2.) Use the line drawing tool to draw the demand for wireless minutes. Draw the curve such that wireless​ demand, landline demand and supply intersect at the same point. Label

this line​ 'wireless'.

​3.) Use the point drawing tool to indicate the initial equilibrium. Label this point ​'E1​'.

​4.) Use the line drawing tool to show how a specific tax affects the supply of minutes. Label this line ​'S1​'.

Carefully follow the instructions​ above, and only draw the required objects.  

Which of the following statements is​ true?

A.

The deadweight loss in the landline market is the area of the triangle formed by the wireless​ demand, landline​ demand, the new supply​ curve, and the old supply curves.

B.

The deadweight loss in the landline market is zero because demand is perfectly inelastic.

C.

The deadweight loss in the landline market is zero because demand is perfectly elastic.

D.

The deadweight loss in the wireless market is the area of the triangle formed by the wireless​ demand, landline​ demand, the new supply​ curve, and the old supply curves.

Answer 1

Following is the graph, illustrating no dead-weight loss from tax on landlines and substantially more dead-weight loss from tax on cell phones. This is because the demand for landlines is inelastic, i.e. vertical and does not change with price. Whereas, the demand for cell phones is highly elastic, therefore a tax leads to higher DWL on wireless.

In the statements below, only the statement B is true; The ddeadweight loss in the landline market is zero because demand is perfectly inelastic.