In the absence of taxes,Ashley would prefer to purchase a large sport utility vehicle (SUV).The government has recently decided to place a $10,000 nuisance tax on SUVs.If Ashley decides to purchase a small economy car as a result of the tax,which of the following statements is correct?

Question

Quizplus · Accepted Answer

Option D is correct because the introduction of the $10,000 nuisance tax has caused Ashley to switch from her preferred choice (SUV) to an inferior choice (small economy car). This change of choice makes Ashley worse off and reduces her welfare, which is a part of the deadweight loss of the tax. Deadweight loss occurs when the introduction of a tax alters the behavior of consumers and producers, leading to a loss of welfare in the economy. Options A and B are incorrect as they do not give a complete picture of the effects of the tax. Option C is also incorrect as deadweight loss is not solely dependent on the revenues collected from the tax but also includes the loss in consumer surplus.

In the Absence of Taxes,Ashley Would Prefer to Purchase a Large