Figure: Soda Market How much consumer surplus is lost because of a 70¢ tax?

Question

Figure: Soda Market  How much consumer surplus is lost because of a 70¢ tax?

Quizplus · Accepted Answer

To calculate the consumer surplus lost due to a 70¢ tax, we need to find the area between the demand curve and the new price line after the tax is applied, from the original quantity demanded down to the quantity demanded at the new, higher price. This area represents the difference between the total amount consumers were willing to pay before the tax and the amount they actually pay after the tax. Using the graph, this area is a triangle with a base of 200 million units (from 400 to 600) and a height of 70 cents. The formula for the area of a triangle is 1/2 base x height, so the lost consumer surplus is:

1/2 x 200,000,000 x 0.7 = $70,000,000

Therefore, the correct answer is choice C, $69,000,000 (the closest option offered).

Figure: Soda Market How Much Consumer Surplus Is Lost