Leonard, Sheldon, Raj, and Penny Each Like Science Fiction Moves

question 452

Multiple Choice

Leonard, Sheldon, Raj, and Penny each like science fiction moves. The price of a special boxed set of Star Trek DVDs is $50. Leonard values the set of movies at $70, Sheldon at $65, Raj at $60, and Penny at $55. Suppose that if the government taxes DVDs at $10 each, the price rises to $60. A consequence of the tax is that consumer surplus shrinks by

• A)$50 and tax revenues increase by $30, so there is a deadweight loss of $20.
• B)$35 and tax revenues increase by $30, so there is a deadweight loss of $5.
• C)$20 and tax revenues increase by $20, so there is no deadweight loss.
• D)$15 and tax revenues increase by $20, so there is no deadweight loss.

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Definitions:

Consumer Surplus

Consumer surplus is the difference between the total amount consumers are willing and able to pay for a good or service and the total amount they actually pay.

Property Rights

The legal rights to own, use, and dispose of assets including real estate, personal possessions, and intellectual property.

Producer Surplus

The difference between what producers are willing and able to sell a product for and the actual price they receive, representing the extra benefit to producers.

Consumer Surplus

The difference between the total amount that consumers are willing to pay for a good or service and the total amount they actually pay.