Question

Suppose an individual is selling a car and has a “bottom line” of $18,000. Also suppose that another individual is looking to purchase a car, with a "top dollar" of $21,000.

A wealth-creating transaction is possible, since the seller's bottom line is less than or equal to or greater than the buyer's top dollar. The total surplus from such a purchase would be $

Suppose the government imposes a tax of $5,000 on the purchase of a car.

With this tax, the wealth-creating sale of the car between these two buyers will no longer or still take place.

Answer 1

As it is given that the seller is selling the car at the bottom line of $18000 and the buyer is looking for the car at top dollar of $. 21000

The wealth creating transaction is possible in this case because the sellers bottom line is less than buyers price.So, total surplus occurs$3000(21000-18000)

# If govt imposes a tax of $5000 on the purchase of the cars, the wealth. Creating sale with this tax will not be possible.Reason being, the amount of tax is greater than the total surplus.(5000$>3000$)