Question

12. Aiden gives piano lessons. He has an opportunity cost of $50 per lesson and charges $60. He has two stu- dents: Brandon, who has a willingness to pay of $70, and Chloe, who has a willingness to pay of $90. When the government puts a $20 tax on piano lessons and Aiden raises his price to $80, the deadweight loss is and the tax revenue is a. $10, $20 b. $10, $40 C. $20, $20 d. $20, $40

Answer 1

We know,

Deadweight loss is the overall loss in both producer surplus and consumer surplus after a new policy impacts a change in price (here taxation).

Tax Revenue is the sum of tax collected from each unit sold (here each lesson given).

As we can see,

When the Price of Piano lesson is $60 both Brandon with willingness to pay $70 and Chloe with willingness to pay $90 can take the piano lesson

After the Price rise to $80, Brandon cannot afford to pay as his willingness to pay is $70. So he will not take Piano lesson.

• Loss in Consumer Surplus from Brandon not taking class = $70 - $60 = $10
• Loss in Producer Surplus for Aiden from Brandon not taking class = $60 - $50 = $10

Hence, The total loss in surplus = Deadweight loss = $10 + $10 = $20

Now,

Only Chloe will now take the Piano lesson.

As, Tax per lesson = $20

So, Total Tax Revenue = $20 * 1 = $20

Hence, Deadweight loss is $20 and the Tax revenue is $20

So, Option c. $20, $20 ​​​​​​​is correct