Scenario 8-1
Erin would be willing to pay as much as $100 per week to have her house cleaned.Ernesto's opportunity cost of cleaning Erin's house is $70 per week.
-Refer to Scenario 8-1.Assume Erin is required to pay a tax of $5 when she hires someone to clean her house.Which of the following is true?
A)Erin will continue to hire Ernesto to clean her house,but her consumer surplus will decline.
B)Ernesto will continue to clean Erin's house,and his producer surplus will increase.
C)Total economic welfare (consumer surplus plus producer surplus plus tax revenue)will decrease.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

Erin will still be willing to pay $100 to have her house cleaned, but with the $5 tax, she will now have to pay $105. Since Ernesto's opportunity cost is still only $70, he will continue to clean Erin's house. However, Erin's consumer surplus will decrease because she is now paying more than she originally wanted to. The producer surplus may or may not increase depending on how much of the tax is passed on to Ernesto. Total economic welfare will decrease due to the tax.

Scenario 8-1 Erin Would Be Willing to Pay as Much as $100