Question

Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. a. What possible prices for the haircut would be beneficial to both Maria and Juan? How much total surplus (i.e., the sum of consumer and producer surplus) would be generated by this haircut? Any price higher than but lower than will result in a trade. Total surplus will be b. If the state where Maria and Juan live instituted a tax on services that included a $5 per haircut tax on stylists and barbers, what happens to the range of haircut prices that benefit both Maria and Juan? Will the haircut still happen? Will this tax alter the total economic benefit of this haircut? If the price is higher than $5 but lower than there will still be a trade. Total economic benefit will be c. What if instead the tax was $20? There would be no trade because $20 is less than the minimum price Juan would accept. There would be a trade because the tax is greater than the total economic benefit without the tax. There would be no trade because the minimum price Juan would accept is higher than Maria's maximum price. There would be a trade because the tax is less than both Juan's minimum price and Maria's maximum price.

Answer 1

The possible haircut prices beneficial for both Maria and Juan range between $25 and $40, allowing for trade with a total economic benefit. A $5 tax adjusts Juan's minimal acceptable price to $30 and reduces the surplus, but trade can still occur. However, a $20 tax prevents any trade as it exceeds Maria's maximum willingness to pay.

Step-by-step explanation:

When Maria is willing to pay $40 for a haircut, and Juan is willing to accept as little as $25 for a haircut, any price between $25 and $40 would be beneficial for both parties, as Maria would pay less than her maximum willingness to pay, and Juan would receive more than his minimum acceptable price. If the haircut price is set at any point within this range, both consumer and producer surplus are created, adding up to the total economic benefit from the trade.

Now, when a $5 service tax is imposed, Juan's minimum acceptable price effectively becomes $30 to maintain his original desired earnings. If the haircut price is above $30 but still below Maria's maximum of $40, the trade can still take place, although the total surplus will be reduced by at least the amount of the tax because it represents an additional cost to the transaction.

If a $20 tax is introduced, no trade will occur because Juan's minimum acceptable price, including the tax ($25 + $20 = $45), would exceed Maria's maximum willingness to pay ($40). Therefore, the tax would entirely eliminate the potential economic benefit of the haircut for these two individuals.

Answer 2

Any haircut price between $25 and $40 is mutually beneficial for Maria and Juan, creating an economic surplus. A $5 tax shifts the range to $30-$40 and reduces the economic benefit by $5.

Step-by-step explanation:

In the scenario where Maria is willing to pay $40 for a haircut, and Juan is willing to accept as little as $25, the range of possible prices that would benefit both Maria and Juan would be any price between $25 and $40. This range would generate a total economic surplus, which is the sum of consumer and producer surplus.

Tax impact: If a $5 tax per haircut is imposed on stylists and barbers, the range of beneficial haircut prices shifts. Juan would need to receive at least $30 to cover his minimum price plus the tax, reducing the range to $30-$40. The haircut would still occur if the price is set within this range, but the total economic benefit of the haircut would be reduced by the amount of the tax.

With a $20 tax, there will be no trade because the minimum price Juan would accept (which would be $45 including the $20 tax) exceeds Maria's maximum willingness to pay ($40). Thus, the trade is not viable, and the economic benefit of the haircut is lost.