AP_Krugman_Textbook

3. 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

1. c


2. 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

3. 
   

   b

   
   


4. 
   

   d

   
   


5. 
   

   c
   Tackle the Test:
   Free-Response Questions

   
   


6. 
   

Module 51

Check Your Understanding

1. 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.


2. 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