Practice_Problems_05 - Notes 05: Answers to Practice...

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Unformatted text preview: Notes 05: Answers to Practice Problems 1. C) The change in the gains from trade includes both the dead weight loss and the reductions in consumer and producer surplus. 2. C) Subsidies benefit both demanders and suppliers (by increasing their surplus) at the cost of government spending. 3. C) The percentage changes in quantity and price are needed to compute the elasticity of demand for ties. 4. False) The economic consequences of a tax are the same regardless of who pays the tax. 5. Here is the chart with beforetax information: Unit 1 2 3 4 5 6 7 8 9 10 11 MC $ 2.00 $ 2.50 $ 3.00 $ 3.50 $ 4.00 $ 4.50 $ 5.00 $ 5.50 $ 6.00 $ 6.50 $ 7.00 PS $ 4.00 $ 3.50 $ 3.00 $ 2.50 $ 2.00 $ 1.50 $ 1.00 $ 0.50 $ MV $ 20.00 $ 18.00 $ 16.00 $ 14.00 $ 12.00 $ 10.00 $ 8.00 $ 7.00 $ 6.00 $ 5.00 $ 4.00 CS $ 14.00 $ 12.00 $ 10.00 $ 8.00 $ 6.00 $ 4.00 $ 2.00 $ 1.00 $ a. The equilibrium price and quantity are $6 and 9 units. Consumer and producer surplus are $57 and $18. Gains from trade are $75. b. After the tax the cart looks like the following: Unit 1 2 3 4 5 6 7 8 9 10 11 MC $ 2.00 $ 2.50 $ 3.00 $ 3.50 $ 4.00 $ 4.50 $ 5.00 $ 5.50 $ 6.00 $ 6.50 $ 7.00 MC+tax $ 5.00 $ 5.50 $ 6.00 $ 6.50 $ 7.00 $ 7.50 $ 8.00 $ 8.50 $ 9.00 $ 9.50 $ 10.00 PS $ 3.00 $ 2.50 $ 2.00 $ 1.50 $ 1.00 $ 0.50 $ MV $ 20.00 $ 18.00 $ 16.00 $ 14.00 $ 12.00 $ 10.00 $ 8.00 $ 7.00 $ 6.00 $ 5.00 $ 4.00 CS $ 12.00 $ 10.00 $ 8.00 $ 6.00 $ 4.00 $ 2.00 $ The new equilibrium price and quantity are $8 and 7 units. The consumer and producer surplus are $42 and $10.50. Government tax revenue is $21. The dead weight loss is $1.50. c. If the tax is applied to consumers instead of producers, the economic results are the same so the consumer and producer surplus are the same as in part (b). d. After the quota, the equilibrium price is $14 since consumers will demand 4 units at this price. The resulting consumer and producer surplus are $12 and $45. Producers would be in favor of this quota due to the increase in producer surplus. e. A price minimum of $14 would have the same results as part (d). f. A price maximum gives a new chart: Unit 1 2 3 4 MC $ 2.00 $ 2.50 $ 3.00 $ 3.50 PS $ 1.50 $ 1.00 $ 0.50 $ MV $ 20.00 $ 18.00 $ 16.00 $ 14.00 CS $ 16.50 $ 14.50 $ 12.50 $ 10.50 The new consumer and producer surplus are $54 and $3. Producers would prefer a quota of 4 because the producer surplus is so much larger in that case. 6. E) The new quantity consumed and produced is lower the greater the elasticity of supply, resulting (A) and (C). Answer choice (B) is given in the notes, and can be verified by carefully drawing a supply and demand graph with a per unit tax. 7. B) A price minimum will not be effective if it is at or below the equilibrium price. 8. This question is the same as 7. 9. D) Since demanders and suppliers share the burden of a tax, the price of pickers will rise by less than $1. 10. C) 11. D) 12. B) 13. C) 14. A) 15. B) 16. E) 17. A) 18. From the graph, consumer surplus goes down, producer surplus goes up, and gains from trade are unchanged (since quantity does not change). This answer choice is not available (typo). $/Q S Pmin P* D Q Q* 19. B) A price maximum reduces producer surplus. 20. E) A price minimum, set above the efficient or equilibrium level, will raise price and lower quantity. ...
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