Question

A consumer values a house at $525,000 and a producer values the same house at $485,000. If the transaction is completed at $510,000, what amount of tax may result in unconsummated transaction

Answer 1

Answer:

the options were missing:

• a tax of $9,000
• a tax of $14,000
• a tax of $15,000
• a tax of $18,000

the answer is a tax of $18,000

Explanation:

in this case, the seller surplus = $510,000 - $485,000 = $25,000, while consumer surplus = $525,000 - $510,000 = $15,000

Taxes decrease consumer surplus, but consumers are still willing to purchase goods if the price of the goods plus the taxes is equal or less to the maximum price that they are willing to pay. But $510,000 + $18,000 = $528,000 which is higher than $525,000