📚 Learning Guide
Marginal Cost and Benefit Analysis
hard

In a market at equilibrium, how does the analysis of marginal costs and benefits influence consumer surplus when a new tax is introduced?

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Learning Path

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Choose the Best Answer

A

Consumer surplus will increase as quantity demanded decreases.

B

Consumer surplus will decrease as the price rises due to the tax.

C

Consumer surplus will remain unchanged since market equilibrium is maintained.

D

Consumer surplus can only be determined by the elasticity of demand.

Understanding the Answer

Let's break down why this is correct

Answer

In a market at equilibrium, the price of goods is set where the quantity demanded by consumers equals the quantity supplied by producers. When a new tax is introduced, it raises the price consumers have to pay, which can change their purchasing decisions. This means that the marginal benefit, or the satisfaction gained from consuming one more unit, may no longer equal the marginal cost, or the price they must pay after the tax. As a result, consumer surplus, which is the difference between what consumers are willing to pay and what they actually pay, decreases because consumers either buy less or stop buying altogether. For example, if a tax increases the price of a popular snack from $2 to $2.

Detailed Explanation

When a tax is added, prices go up. Other options are incorrect because This suggests that less demand leads to more surplus, which is not true; This option thinks nothing changes with a tax.

Key Concepts

Decision-making
Consumer surplus
Market equilibrium
Topic

Marginal Cost and Benefit Analysis

Difficulty

hard level question

Cognitive Level

understand

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