Scenario 12-3
Suppose that Bob places a value of $10 on a movie ticket and that Lisa places a value of $7 on a movie ticket. In addition, suppose the price of a movie ticket is $5.
-Refer to Scenario 12-3.Suppose the government levies a tax of $3 on a movie ticket and that,as a result,the price of a movie ticket increases to $8.What is the deadweight loss from the tax?
A) $0
B) $1
C) $2
D) $3

Question

Quizplus · Accepted Answer

The deadweight loss from the tax is the loss in consumer and producer surplus when the tax is imposed. In this case, before the tax, the consumer surplus is ($10 - $5) + ($7 - $5) = $7 and the producer surplus is ($5 - $0) = $5, resulting in a total surplus of $12. After the tax, the consumer surplus decreases to ($10 - $8) + ($7 - $8 + $3) = $4 and the producer surplus decreases to ($8 - $0 - $3) = $5, resulting in a total surplus of $9. The deadweight loss is the difference between the two surpluses, which is $12 - $9 = $3. However, since the tax revenue generated is $3, the net loss to society is only $2 ($3 deadweight loss - $3 tax revenue). Therefore, the correct answer is C) $2.

Scenario 12-3 Suppose That Bob Places a Value of $10 on a on a Movie