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101_PS7_ans_03

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Econ 101 Answers for Problem Set 7 Answers to Review Questions 1. If a policy is not efficient, then it can, by definition, be altered in a way that benefits at least some people without harming others. Economists favor efficient policies, because such policies make additional resources available for the pursuit of other goals. 2. If enacted, the proposed policy will not, by itself, make everyone better off. But suppose the policy is combined with a tax on workers that is used to pay for a \$5 million/yr increase in Social Security payments to retirees. This combination will make everyone better off. 3. The loss experienced by participants in the market for a taxed good will be offset in part by the benefit citizens receive from the public goods purchased with the resulting tax revenue. 4. The compensation policy leads those who have the least to lose by missing the current flight to volunteer to wait. The first-come, first-served policy often inconveniences those who face much higher losses. 5. Price supports encourage producers to expand production beyond the point at which the marginal cost of production is equal to its marginal benefit (the point at which supply and demand intersect). All output beyond that point costs more to produce than what buyers are willing to pay for it. Answers to Problems 1a. Consumer surplus is the triangular area between the demand curve and the price line. Its area is equal to 0.5bh, where b is the base of the triangle and h is the height. The base is 6 units and the height is 1.5 units, measured in dollars. Therefore, consumer surplus is 0.5(\$1.50/unit)(6 units/wk), or \$4.50 per week. b. Producer surplus is the triangular area between the supply curve and the price line. Using the base- height formula, it is (0.5)(\$4.50/unit)(6 units/wk), or \$13.50 per week. c. The maximum weekly amount that consumers and producers together would be willing to pay to trade in used DVDs is the sum of gains from trading in used DVDs—namely, the total economic surplus generated per week, which is \$18 per week. 2a. At a price of \$7.50, the quantity supplied per week = 2. The quantity demanded at this price is 18 per week, which implies a weekly shortage of 16 used DVDs.

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