Question

Refer the Scenario. Dominic plows Soraya's driveway for $85. Dominic's opportunity cost of plowing Soraya's driveway is $55, and Soraya's willingness to pay Dominic to plow her driveway is $100.Assume Dominic is required to pay a tax of $15 each time he plows a driveway. Which of the following results is most likely?

a. Dominic and Soraya still engage in a mutually-agreeable trade.
b. Soraya still willing to pay Dominic to plow her driveway, but Dominic will decline her offer.
c. Dominic still willing to plow Soraya's driveway, but Soraya will decide to shovel her own driveway.
d. Soraya now will decide to shovel her own driveway, and Dominic will decide it is no longer in his interest to plow Soraya's driveway.

Answer 1

Dominic and Soraya are likely to continue engaging in a mutually-agreeable trade despite the tax.

Step-by-step explanation:

In this scenario, Dominic's willingness to plow Soraya's driveway for $85 is lower than his opportunity cost of plowing her driveway, which is $55. This means that he is losing $55 by choosing to plow her driveway instead of engaging in an alternative activity. Additionally, Soraya's willingness to pay Dominic $100 to plow her driveway indicates that she values his service more than what Dominic values his time. However, the inclusion of a $15 tax each time Dominic plows a driveway changes the situation.with the tax, Dominic's net earning from plowing Soraya's driveway would only be $70 ($85 - $15). This is still higher than his opportunity cost, so he would still be willing to plow her driveway. On the other hand, Soraya's willingness to pay remains at $100, which is still higher than Dominic's net earnings. Therefore, both Dominic and Soraya are likely to continue engaging in a mutually-agreeable trade.

The correct answer is a) Dominic and Soraya still engage in a mutually-agreeable trade.