Scenario 8-1
Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week.
-Refer to Scenario 8-1.Assume Erin is required to pay a tax of $15 when she hires someone to clean her house.Which of the following is true?
A) Erin will continue to hire Ernesto to clean her house, but her consumer surplus will decline.
B) Ernesto will continue to clean Erin's house, and his producer surplus will increase.
C) Total economic welfare (consumer surplus plus producer surplus plus tax revenue) will decrease.
D) All of the above are correct.

Question

Quizplus · Accepted Answer

With the tax, Erin's total cost of hiring Ernesto would be $115 ($100 plus $15 tax). Since his opportunity cost is only $70, Ernesto's producer surplus will remain the same. Erin will continue to hire Ernesto because her willingness to pay is still higher than her total cost, but her consumer surplus will decline due to the additional $15 tax. Total economic welfare will decrease, but not as much as if Erin stopped hiring Ernesto altogether.

Scenario 8-1 Erin Would Be Willing to Pay as Much as $100