Figure 8-11

-Refer to Figure 8-11.Suppose Q₁ = 4; Q₂ = 7; P₁ = $6; P₂ = $8; and P₃ = $10.Then,when the tax is imposed,

Question

Figure 8-11
 
-Refer to Figure 8-11.Suppose Q₁ = 4; Q₂ = 7; P₁ = $6; P₂ = $8; and P₃ = $10.Then,when the tax is imposed,

Quizplus · Accepted Answer

The tax creates a wedge between the price paid by consumers and the price received by producers. With the given values, the equilibrium quantity will decrease from 10 to 5.

Before the tax: 
Consumer surplus = 0.5 x (10-6) x 10 = $20 
Producer surplus = 0.5 x (8-4) x 10 = $20

Total surplus = $40

After the tax: 
Consumer surplus = 0.5 x (10-6) x 5 = $10 
Producer surplus = 0.5 x (8-4) x 5 = $10

Tax revenue = $2 x 5 = $10

Total surplus = $20

Therefore, consumer surplus decreases by $10, which is answer choice C.

Figure 8-11 -Refer to Figure 8-11.Suppose Q₁ = 4; Q₂ = 7;