Figure 18-2

Figure 18-2 shows a demand curve and two sets of supply curves, one set more elastic than the other.
-Refer to Figure 18-2.If the government imposes an excise tax of $1.00 on every unit sold, the government's revenue from the tax is represented by the area
A)(PₐPc × Qₐ)if the supply curve is S₀ and (PbPc × Qb)if the supply curve is S₁.
B)(PₐPd × Qₐ)if the supply curve is S₀ and (PbPₑ × Qb)if the supply curve is S₁.
C)(PₐPₑ × Qₐ)under either supply curve.
D)(PbPₑ × Qb)under either supply curve.

Question

Figure 18-2
  
Figure 18-2 shows a demand curve and two sets of supply curves, one set more elastic than the other.
-Refer to Figure 18-2.If the government imposes an excise tax of $1.00 on every unit sold, the government's revenue from the tax is represented by the area
A)(PₐPc × Qₐ)if the supply curve is S₀ and (PbPc × Qb)if the supply curve is S₁. 
B)(PₐPd × Qₐ)if the supply curve is S₀ and (PbPₑ × Qb)if the supply curve is S₁. 
C)(PₐPₑ × Qₐ)under either supply curve. 
D)(PbPₑ × Qb)under either supply curve.

Quizplus · Accepted Answer

When an excise tax is imposed, the supply curve shifts upwards by the amount of the tax. In this case, the excise tax is $1.00 per unit, so the new supply curves are S₀' and S₁', where S₀' and S₁' are $1.00 above S₀ and S₁ respectively.

The new equilibrium price is the point where each supply curve intersects the demand curve. The new equilibrium quantity is the quantity demanded at this price.

The government's revenue from the tax is equal to the tax per unit multiplied by the quantity sold.

Using S₀', the government's revenue is represented by the rectangle with coordinates (Pa, Pc) and (Pa, Pd). The width of the rectangle is Qa, and its height is $1.00, so the area of the rectangle is $1.00 × Qa = PₐPd × Qa.

Using S₁', the government's revenue is represented by the rectangle with coordinates (Pb, Pe) and (Pb, Pc). The width of the rectangle is Qb, and its height is $1.00, so the area of the rectangle is $1.00 × Qb = PbPe × Qb.

Therefore, the correct answer is B.

Figure 18-2 Figure 18-2 Shows a Demand Curve and Two Sets of Curve