Exam 10: Consumer Surplus and Deadweight Loss

Correct Answer:

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a.This is the steeper of the two solid budget constraints in the graphs below.
b.This is the shallower of the two solid budget constraints in the graphs below.
c.This is illustrated in the first graph as the vertical distance above A.

d.The second graph shows how much could have been raised from this worker without making him worse off if we used a lump sum tax that does not distort prices.Since this is larger than what we actually raise in the first graph,the tax is inefficient.
e.Within the model,a wage tax of 20% would look exactly the same way -- whether the worker is taxed at the time of receiving the paycheck or when he goes to the store to purchase goods is irrelevant to the analysis.In the real world,however,the worker might put part of his paycheck aside as savings.As a result,it matters whether the tax is taken out as he gets his paycheck or whether it is taken when he purchases goods.The broad based consumption tax differs from the wage tax in the real world because of the different impact the two might have on savings behavior and intertemporal choices.