Question

Assume that the government places a $4 tax on each slice of cheesecake and that the new equilibrium price is $9. What is Regina's consumer surplus from cheesecake

Answer 1

Regina's consumer surplus from cheesecake is  $1.

How to calculate Consumer Surplus?

Consumer surplus = 1/2 x Demand at equilibrium x (Maximum price the buyer is willing to pay)

Without tax:

Regina is willing to pay = $8 - $5 equilibrium price = $3

With taxes:

Regina is willing to pay $8 - $7 equilibrium price = $1

What is consumer surplus?

Consumers' surplus is a measure of consumer welfare and is defined as the excess of social valuation of product over the price actually paid. It is measured by the area of a triangle below a demand curve and above the observed price.

t is positive when what the consumer is willing to pay for the commodity is greater than the actual price. Consumer surplus is infinite when the demand curve is inelastic and zero in case of a perfectly elastic demand curve.

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