Figure 8-11
-Refer to Figure 8-11. Suppose Q1 = 4; Q2 = 7; P1 = $6; P2 = $8; and P3 = $10. Then, when the tax is imposed,
A) consumer surplus decreases by $11.
B) producer surplus decreases by $11.
C) the deadweight loss amounts to $6.
D) All of the above are correct.

Question

Figure 8-11 
-Refer to Figure 8-11. Suppose Q1 = 4; Q2 = 7; P1 = $6; P2 = $8; and P3 = $10. Then, when the tax is imposed,
A) consumer surplus decreases by $11. 
B) producer surplus decreases by $11. 
C) the deadweight loss amounts to $6. 
D) All of the above are correct.

Quizplus · Accepted Answer

When the tax is imposed, the equilibrium price for the consumers will increase from $8 to $10 ($8 + $2 tax). This will reduce the consumer surplus by area A+C in the graph, which is equal to ($10-$6)*4/2 = $8.

For the producers, the after-tax equilibrium price will be $8 ($10-$2 tax), which is lower than the original equilibrium price of $8. This will reduce the producer surplus by area B+C in the graph, which is equal to ($8-$6)*7/2 = $7.

Together, the reduction in consumer and producer surpluses will be $8+$7=$15. However, the government will collect $2*11=$22 in tax revenue. This creates a deadweight loss of $22-$15=$7.

Therefore, all statements A, B, and C are correct, which makes D the correct option.

Figure 8-11 -Refer to Figure 8-11. Suppose Q1 = 4; Q2 =