A table below shows the willingness-to-pay for a single-short cappuccino of five consumers as well as the cost of selling a single-short cappuccino for five coffee shops. For simplicity, assume that each consumer buys at most one cappuccino and each producer sells at most one cappuccino (i.e., the supply and demand functions have a staircase shape.)

Suppose the government is attempting to cut down caffeine consumption by imposing a tax of $1 per cappuccino on consumers. Assume there are no administrative costs form the tax. Assume that if a consumer or producer is indifferent, that they will trade.

1. Without the excise tax, what is the equilibrium quantity and the price that will be paid to producers? Incorrect. Use the table to determine at which price the equilibrium number of coffees will be traded.
2. With the excise tax, what is the equilibrium quantity and the price that will be paid to producers?
3. What is the deadweight loss form the imposition of this excise tax?

Transcribed Image Text:

Consumer Willingness to pay Stephen $3.50 Terry 3.25 Rachel 3.00 Jon 2.75 Christiane 2.50 Producer Cost MoJo's JC Java Pacha Ruta Inca $2.00 2.25 2.50 2.75 Anderson's 3.00 Number 4 Number 2 $ 0.5 Number cappuccinos $ 3 Number Number cappuccinos $ 2.5 Consumer Willingness to pay Stephen $3.50 Terry 3.25 Rachel 3.00 Jon 2.75 Christiane 2.50 Producer Cost MoJo's JC Java Pacha Ruta Inca $2.00 2.25 2.50 2.75 Anderson's 3.00 Number 4 Number 2 $ 0.5 Number cappuccinos $ 3 Number Number cappuccinos $ 2.5

Answer rating: 100% (QA)

1 Without the excise tax the equilibrium quantity is achieved at the level where ... View the full answer