Question

Martin's maximum willingness to pay for an electric boat motor is $250. Because of a tax,...

Martin's maximum willingness to pay for an electric boat motor is $250. Because of a tax, the price of the motor increases from $230 to $280. The deadweight loss of the tax attributable to Martin is:

A. $20

B. $250

C. $50

D. 430

Please explain why A is correct.

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Answer #1

Answer.) A.) $20

Before tax imposition, with price $230 for a motor boat, Martin was having a consumer surplus of $20. Remember that consumer surplus is the difference between Consumer maximum willingness to pay and the price actually paid . Now, since , after tax imposition, price is higher than Martin's maximum willingness to pay, therefore, he would not demand any motor boat and hence his initial consumer surplus would be counted as a part of dead weight loss created by tax. Note that Question has asked to find out the dead weight loss of tax attributable to Martin, therefore, we are not counting Producers share in dead weight loss.

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