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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Andy gives piano lessons. He has an opportunity cost of $50 per lesson and charges $60. He has two students: Bob, who has a willingness to pay of $70, and Carl, who has a willingness to pay of $90. When the government puts a $20 tax on piano lessons and Andy raises his price to $80, the deadweight loss is _________ and the tax revenue is __________.

  1. a. $10, $20
  2. b. $10, $40
  3. c. $20, $20
  4. d. $20, $40

To determine
The deadweight loss and tax revenue.

Explanation

Initially, Andy charges $60 for giving piano lesson to each student. Brandon and Chloe are willing to pay $70 and $90 respectively. Now the government puts a tax of $20 on the piano lesson. So, Andy raises his price to $80. Before tax, Brandon gets a consumer surplus of $10 and Chloe gets a consumer surplus of $30 and thereby the total surplus is $40. After tax, Chloe still takes the piano lesson but now he gets the consumer surplus of $10. And, Brandon decides not to take the piano lesson because its price is higher than its value.

Option (c):

Dead weight loss can be calculated as follows:

Deadweight loss=(Willing priceBrandPriceFor class)+(Willing priceChlPriceFor class

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