Question

Use the following information to answer the questions that follow. The following graph depicts a market where a tax has been imposed. Po was the equilibrium price before the tax was imposed, and was the equilibrium quantity. After the tax, Pc is the price that consumers pay, and Ps is the price that producers receive. QT units are sold after the tax is imposed. NOTE: The areas B and Care rectangles that are divided by the supply curve S7. Include both sections of those rectangles when choosing your answers. P x Q Q What is the total amount of producer and consumer surplus (i.e., social welfare) in this market after the tax is imposed? OA) F+G B) A+B+C+E+F+G OC) B+C+F+G OD A+E

Answer 1

Consumer surplus(CS) is area below the demand curve and above the price line. Before tax CS was area A+B+F. After tax, this area is reduced to only A. (B goes to government and F is deadweight loss).

Producer surplus(PS) is the area above the supply curve and below the price line. Before tax PS was area C+G+E. After tax, this area is reduced to only E. (C goes to government and G is deadweight loss).

Therefore, after tax total surplus is area A + E (Option D)