   Chapter 12, Problem 2CQQ

Chapter
Section
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 __________. a. $10,$20 b. $10,$40 c. $20,$20 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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