Chapter 1. eFigure 3.13
eFigure
Question 1.1
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Correct! The imposition of the tax does not change the market demand for movies. Nothing has changed the value consumers place on movies or their willingness to pay for the experience. Market supply does change because theater owners are now subject to the $0.50 tax. At every price, theater owners need an additional $0.50 to cover the cost of the tax. Essentially, the theater owners have experienced an increase in their costs and the supply curve has shifted upward (back, in, left) by $0.50.
Incorrect. The imposition of the tax does not change the market demand for movies. Nothing has changed the value consumers place on movies or their willingness to pay for the experience. Market supply does change because theater owners are now subject to the $0.50 tax. At every price, theater owners need an additional $0.50 to cover the cost of the tax. Essentially, the theater owners have experienced an increase in their costs and the supply curve has shifted upward (back, in, left) by $0.50.
Question 1.2
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Correct! Following the imposition of the tax, areas B + D represent the revenue collected by the government. Notice that this area is equal to the amount of the tax (the height of area B + D) multiplied by the number of tickets sold (the length of area B + D). Since governments raise revenue in order to provide government services to consumers and producers, it constitutes an additional source of surplus. Given this, it is not included in our deadweight loss calculation.
Incorrect. Following the imposition of the tax, areas B + D represent the revenue collected by the government. Notice that this area is equal to the amount of the tax (the height of area B + D) multiplied by the number of tickets sold (the length of area B + D). Since governments raise revenue in order to provide government services to consumers and producers, it constitutes an additional source of surplus. Given this, it is not included in our deadweight loss calculation.
Question 1.3
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Correct! The imposition of the tax has several consequences for theater owners. At every quantity they must pay $.050 more, which is in essence an increase in their costs. This shifts up their supply curve, resulting in a higher price for consumers which results in the sale of fewer tickets. In addition, despite the higher price of movies ($8.30 in place of $8.00), theater owners receive a less from each ticket sold ($7.80 in place of $8.00). Each of these factors contributes to the loss of producer surplus resulting from the imposition of the tax.
Incorrect.The imposition of the tax has several consequences for theater owners. At every quantity they must pay $.050 more, which is in essence an increase in their costs. This shifts up their supply curve, resulting in a higher price for consumers which results in the sale of fewer tickets. In addition, despite the higher price of movies ($8.30 in place of $8.00), theater owners receive a less from each ticket sold ($7.80 in place of $8.00). Each of these factors contributes to the loss of producer surplus resulting from the imposition of the tax.
Question 1.4
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Correct! The imposition of the tax results in a transfer of consumer surplus to the government (area B) and a transfer of producer surplus to the government (area D) through government tax revenues. In addition, the tax creates a wedge between what consumers pay and what producers receive. This wedge between the prices drives out some of the highest cost theatres, resulting in fewer theatre tickets being sold, at a higher price. This also reduces surplus, creating deadweight loss (areas C +E).
Incorrect. The imposition of the tax results in a transfer of consumer surplus to the government (area B) and a transfer of producer surplus to the government (area D) through government tax revenues. In addition, the tax creates a wedge between what consumers pay and what producers receive. This wedge between the prices drives out some of the highest cost theatres, resulting in fewer theatre tickets being sold, at a higher price. This also reduces surplus, creating deadweight loss (areas C +E).