In the Absence of Taxes, Carlos Would Prefer to Purchase

question 124

Multiple Choice

In the absence of taxes, Carlos would prefer to purchase a large fishing boat with a 75 hp motor. The government has recently decided to place a tax on boats with 75 hp motors or higher. If Carlos decides to purchase a smaller boat with a 50 hp motor as a result of the tax, which of the following statements is correct?

• A)Other people who choose to purchase large boats will incur the cost of the deadweight loss of the tax.
• B)There are no deadweight losses as long as some people still choose to purchase large boats.
• C)In order to determine the size of the deadweight loss, we must add the revenues from the tax to the loss in Carlos's consumer surplus.
• D)Carlos is worse off, and his loss of welfare is part of the deadweight loss of the tax.

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Definitions:

Annuity

A financial product that pays out a fixed stream of payments to an individual, often used as an income stream for retirees.

Equal Payments

Regularly scheduled payments of the same amount, often used in the repayment of loans.

Installment Note

A debt instrument that requires periodic payments of principal and interest over the term of the loan.

Present Value

The value today of a future sum of money or sequence of cash payments, adjusted for a specific rate of return.