Scenario 8-1
Ryan would be willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of cleaning Ryan's house is $70 per week.
-Refer to Scenario 8-1.Assume Ryan is required to pay a tax of $15 when he hires someone to clean his house.Which of the following is true?
A)Ryan will continue to hire Tammy to clean his house but his consumer surplus will decline.
B)Tammy will continue to clean Ryan's house but her producer surplus will decline.
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

Ryan will still hire Tammy since the total cost ($70 + $15 tax = $85) is less than his willingness to pay ($100). However, his consumer surplus decreases by $15 due to the tax. Tammy's producer surplus remains the same, but total economic welfare decreases because the tax creates a deadweight loss.

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