- a.Without the excise tax, Zhang, Yves, Xavier, and Walter
sell, and Ana, Bernice, Chizuko, and Dagmar buy one can
of soda each, at $0.40 per can. So the quantity bought
and sold is 4.
b.With the excise tax, Zhang and Yves sell, and Ana and
Bernice buy one can of soda each. So the quantity sold
is 2.
c.Without the excise tax, Ana’s individual consumer sur-
plus is $0.70 −$0.40 =$0.30, Bernice’s is $0.60 −$0.40
=$0.20, Chizuko’s is $0.50 −$0.40 =$0.10, and
Dagmar’s is $0.40 −$0.40 =$0.00. Total consumer sur-
plus is $0.30 +$0.20 +$0.10 +$0.00 =$0.60. With the
tax, Ana’s individual consumer surplus is $0.70 −$0.60 =
$0.10 and Bernice’s is $0.60 −$0.60 =$0.00. Total con-
sumer surplus post-tax is $0.10 +$0.00 =$0.10. So the
total consumer surplus lost because of the tax is $0.60 −
$0.10 =$0.50.
d.Without the excise tax, Zhang’s individual producer sur-
plus is $0.40 −$0.10 =$0.30, Yves’s is $0.40 −$0.20 =
$0.20, Xavier’s is $0.40 −$0.30 =$0.10, and Walter’s is
$0.40 −$0.40 =$0.00. Total producer surplus is $0.30 +
$0.20 +$0.10 +$0.00 =$0.60. With the tax, Zhang’s
individual producer surplus is $0.20 −$0.10 =$0.10 and
Yves’s is $0.20 −$0.20 =$0.00. Total producer surplus
post-tax is $0.10 +$0.00 =$0.10. So the total producer
surplus lost because of the tax is $0.60 −$0.10 =$0.50.
e.With the tax, two cans of soda are sold, so the govern-
ment tax revenue from this excise tax is 2 ×$0.40 =
$0.80.
f.Total surplus without the tax is $0.60 +$0.60 =$1.20.
With the tax, total surplus is $0.10 +$0.10 =$0.20, and
government tax revenue is $0.80. So deadweight loss
from this excise tax is $1.20 −($0.20 +$0.80) =$0.20.
Tackle the Test:
Multiple-Choice Questions
- c
- e
0 67 8 9 10 11 1312 14
$1.40
1.30
1.20
1.10
1.00
0.90
0.80
0.70
0.60
Quantity of butter (millions of pounds)
Price
of butter
(per pound)
D
S
E
$0.20 of tax
falls on
consumers
$0.10 of tax
falls on producers
Price paid by
consumers
post-tax
Price received
by producers
post-tax
Price pre-tax
b
d
c
Tackle the Test:
Free-Response Questions
Module 51
Check Your Understanding
- Consuming a unit that generates negative marginal
utility leaves the consumer with lower total utility
than not consuming that unit at all. A rational con-
sumer, a consumer who maximizes utility, would not
do that. For example, Figure 51.1 shows that Cassie
receives 64 utils if she consumes 8 clams, but if she
consumes a 9th clam, she loses a util, decreasing her
total utility to only 63 utils. Whenever consuming a
unit generates negative marginal utility, the consumer
is made better off by not consuming that unit, even
when that unit is free. - a.The accompanying table shows the consumer’s
consumption possibilities, bundles Athrough C.
These consumption possibilities are plotted in the
accompanying diagram, along with the consumer’s
budget line.
Quantity
E
D 2
D 1
Excise
tax
Price
Tax revenue DWL
PC S
PP
PE
QT QE
SOLUTIONS TO AP REVIEW QUESTIONS S-31
Quantity of popcorn Quantity of
Consumption Bundle (buckets) movie tickets
A02
B21
C40