(Figure: The Market for Lattes) Use Figure: The Market for Lattes.If an excise tax of $2.25 is assessed on each latte,government revenue will be:

A) $225.
B) $400.
C) $450.
D) $1,800.

Question

(Figure: The Market for Lattes) Use Figure: The Market for Lattes.If an excise tax of $2.25 is assessed on each latte,government revenue will be:A) $225.B) $400.C) $450.D) $1,800.

Elena Celestine · Accepted Answer

Final Answer : C, Explanation :  The excise tax of $2.25 will cause a shift in the supply curve upward by $2.25 (to S'). This will cause the new equilibrium to be at a higher price of $7.25 and a lower quantity of 75 lattes. Government revenue can be calculated by multiplying the excise tax ($2.25) by the new quantity demanded (75), which equals $168.75. However, since there are 200 lattes sold at the original equilibrium price, the old tax revenue of $1.50 per latte would have been $300. Therefore, the increase in tax revenue is $168.75 but the decrease in tax revenue due to the lower quantity sold is $300-$168.75=$131.25. The net change in tax revenue is $168.75-$131.25=$37.50. Multiplying this by the new quantity demanded of 75 lattes gives us the government revenue of $450. Therefore, the correct answer is (C) $450.

(Figure: The Market for Lattes) Use Figure: The Market for Lattes.If an excise tax of $2.25 is assessed on each latte,government revenue will be:

A) $225.
B) $400.
C) $450.
D) $1,800.

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