Scenario 12-1
Suppose Jim and Joan receive great satisfaction from their consumption of cheesecake.Joan would be willing to purchase only one slice and would pay up to $6 for it.Jim would be willing to pay $9 for his first slice,$7 for his second slice,and $3 for his third slice.The current market price is $3 per slice.
-Refer to Scenario 12-1.Assume that the government places a $4 tax on each slice of cheesecake and that the new equilibrium price is $7.How much tax revenue will be generated from sales to Jim and Joan?
A) zero
B) $4
C) $8
D) $12

Question

Quizplus · Accepted Answer

Since the new equilibrium price is $7, Joan is still willing to purchase a slice at this price. However, Jim's willingness to pay $9 for his first slice goes down to $5 after the tax is imposed ($9 - $4 tax). He is still willing to pay $7 for his second slice and $3 for his third.

Therefore, Jim will only purchase one slice, and the tax revenue generated from his purchase will be $4 ($7 price - $3 willingness to pay). Joan will still purchase one slice at $6, so the tax revenue generated from her purchase will be $2 ($7 price - $6 willingness to pay).

In total, the tax revenue generated from sales to Jim and Joan will be $6 ($4 + $2).

Scenario 12-1 Suppose Jim and Joan Receive Great Satisfaction from Their Consumption