Kyle places a $10 value on a glass of red wine,and Keith places an $8 value on it.If there is no tax on glasses of red wine,the price of a glass of red wine reflects the cost of making it.The equilibrium price for a glass of red wine is $6.Suppose the government levies a tax of $2 on each glass of red wine,and the equilibrium price of a glass of red wine increases to $8.How much tax revenue is collected?
A)$0
B)$2
C)$4
D)$6

Question

Quizplus · Accepted Answer

When the tax is imposed, the price increases from $6 to $8. This means that consumers are paying $2 more per glass than they did before. However, the $2 increase in price is not all going to the producer; $1 of it goes to the government as tax revenue.

To calculate the tax revenue, we need to find the new quantity demanded at the higher price of $8. Using the demand values given for Kyle and Keith, we can find the total quantity demanded at the $6 equilibrium price:

Quantity demanded = (10 - 6) + (8 - 6) = 6 glasses

At the $8 price with the $2 tax, the quantity demanded drops:

Quantity demanded = (10 - 8) + (8 - 8) = 2 glasses

The change in quantity demanded is therefore:

Change in quantity demanded = 6 - 2 = 4 glasses

Multiply the change in quantity demanded by the amount of tax ($1) to find the tax revenue:

Tax revenue = 4 x 1 = $4

Therefore, the correct answer is C.

Kyle Places a $10 Value on a Glass of Red