Suppose Luke Values a Scoop of Italian Gelato at $4

question 71

Multiple Choice

Suppose Luke values a scoop of Italian gelato at $4. Leia values a scoop of Italian gelato at $6. The pre-tax price of a scoop of Italian gelato is $2. The government imposes a "fat tax" of $3 on each scoop of Italian gelato, and the price rises to $5. The deadweight loss from the tax is

• A)$4, and the deadweight loss comes from both Luke and Leia.
• B)$4, and the deadweight loss comes only from Luke because he does not buy gelato after the tax.
• C)$2, and the deadweight loss comes from both Luke and Leia.
• D)$2, and the deadweight loss comes only from Luke because he does not buy gelato after the tax.

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Definitions:

Price Takers

Market participants who accept the prevailing market price without having the influence to alter it.

Output Level

The total quantity of goods or services produced by a business or economy in a given period.

Market Price

The current market value at which an asset or service can be transacted.

Perfect Competition

A market structure characterized by a complete absence of rivalry among the individual firms. In this market, all firms sell an identical product, there are no barriers to entry or exit, and no single firm can influence the market price.