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Adrianne and Joanna love watching plays on Broadway
Adrianne and Joanna love watching plays on Broadway. Adrianne values a play at $85 and Joanna values it as $82. When the price of tickets increased from $80 to $83 following the imposition of tax, Joanna stopped watching plays on Broadway, while Adrianne continued to buy tickets. Identify the correct statement.
A. The decrease in Adrianne's consumer surplus is equal to the deadweight loss.
B. Total consumer surplus decreased by less than the tax revenue.
C. The decrease in Adrianne's surplus is equal to the tax revenue.
D. The deadweight loss is $3.
Expert Solution
The answer is C).
Before the tax, the consumer surplus for Adrianne is 85 - 80 = $5, and for Joanna 82 - 80 = $2, so the total consumer surplus is:
- 5 + 2 = $7
After the tax, the consumer surplus is 85 - 83 = $2 since only Adrianne will go to broadway shows. The government tax revenue is $3. So the deadweight loss = 7 - 2 - 3 = $2.
The decrease in consumer surplus for Adrianne is 5 - 2 = $3, which is equal to the tax revenue, but higher than the deadweight loss.
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