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Exhibit: Stages in the Production of an Office Building

-(Exhibit: Stages in the Production of an Office Building) A mining firm extracts iron from the earth. A steel mill converts the iron to steel beams for use in construction. A construction company uses the steel beams to make a building. Assume that the total product of these firms represents the only components of the building and that they will have no other uses. Suppose the value-added tax is 10%. What is the total VAT collected from all stages of production including final sale?
A) $1,050,000
B) $127,500
C) $95,000
D) $72,500

Question

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Exhibit: Stages in the Production of an Office Building
 
-(Exhibit: Stages in the Production of an Office Building) A mining firm extracts iron from the earth. A steel mill converts the iron to steel beams for use in construction. A construction company uses the steel beams to make a building. Assume that the total product of these firms represents the only components of the building and that they will have no other uses. Suppose the value-added tax is 10%. What is the total VAT collected from all stages of production including final sale?
A) $1,050,000 
B) $127,500 
C) $95,000 
D) $72,500

Quizplus · Accepted Answer

The VAT is collected at each stage of production based on the value added. If the total value of the building is $1,000,000, the VAT collected would be 10% of the value added at each stage. Assuming the value added at each stage is $100,000, $200,000, and $700,000 respectively, the VAT collected would be $10,000 + $20,000 + $70,000 = $100,000. However, since the final sale includes all previous stages, the correct total VAT is $95,000.

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