Scenario 12-1
Ken places a $20 value on a cigar, and Mark places a $17 value on it. The equilibrium price for this brand of cigar is $15.
-Refer to Scenario 12-1. Suppose the government levies a tax of $1 on each cigar, and the equilibrium price of a cigar increases to $16. How much tax revenue is collected?
A)$0
B)$1
C)$2
D)$4

Question

Quizplus · Accepted Answer

With the tax of $1, the price of the cigar increases to $16 which causes a surplus. Therefore, the quantity demanded decreases and the quantity supplied increases. The difference between the new equilibrium quantity and the original equilibrium quantity is 2. Thus, the tax revenue is 2 x $1 = $2. Option C is the only choice that matches the answer.

Scenario 12-1 Ken Places a $20 Value on a Cigar, and Mark