Question

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. What is total consumer surplus after the tax is levied?

Answer 1

Answer:

$5

Explanation:

Consumer surplus is defined as the difference between the highest amount a consumer is willing to pay for a product and the amount the consumer actually pays for the product.

Consumer surplus = willingness to pay - market price

The willingness to pay is the highest amount a consumer would be willing to pay for the purchase of a good or service. It is the value a consumer places on a product.

Before the tax, Ken's consumer surplus = $20 - $15 = $5

Before the tax, Mark's consumer surplus = $17 - $15 = $2

Total consumer surplus- $2 +$5 = $7

After the tax, ken's consumer surplus =$20-$16=$4

After the tax, Mark's consumer surplus = $17 - $16 = $1

Total consumer surplus- $4 + $1 = $5