Scenario 12-2
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 12-2. 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

Before the tax, Bob was willing to pay $10 for a movie ticket and Lisa was willing to pay $7, but now the price is $8. As a result of the tax, Bob is no longer willing to pay $10 and Lisa is no longer willing to pay $7. The deadweight loss is the loss of consumer and producer surplus, which is the area of the triangle between the original supply and demand curves and the new supply and demand curves at the new equilibrium price. This triangle has a height of $2 (the difference between the new and old equilibrium prices) and a base of 1 ticket (the reduction in quantity demanded due to the increased price). Therefore, the deadweight loss is ½ × $2 × 1 = $1.

Scenario 12-2 Suppose That Bob Places a Value of $10 on a on a Movie