Question: Consider the following diagram of a tax. The triangular area representing deadweight loss is highlighted, and its dimensions are labeled "Base" and "Height" (recall that the formula for the area of a triangle is ½ × Base × Height).
a. In order to calculate the deadweight loss of a tax, you don't need the entire demand and supply diagram; you just need to know two numbers, the base and height of the deadweight loss triangle. What is the reallife meaning of the base? What about the height?
b. Can you turn your answers to part a into general rules about the deadweight loss associated with taxes? Try phrasing it like this but replacing the part in brackets: "The larger the base or height, the more deadweight loss is generated by a given tax."
c. Holding the base constant, the height and thus the deadweight loss would get larger if the demand curve or the supply curve were more _________?
d. Without having a diagram as a reference, can you answer the preceding questions for a subsidy?