ps07_sol - Exercise #7 Q1) A market equilibrium is only...

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Unformatted text preview: Exercise #7 Q1) A market equilibrium is only efficient when A) Buyers and sellers each earn equal surplus from the transaction. B) Consumer surplus and producer surplus are both zero. C) All relevant costs, including those imposed on others, are accounted for. D) Income is distributed equitably. E) Firms are earning positive profits. Ans: C Options A ,B and E are not correct all the time. We will illustrate this in a diagram. P Q D S Efficient Consumer Surplus Producer Surplus In this case, CS and PS are not equal, but efficiency is reached. Therefore, A is wrong. B is also wrong as both CS and PS are positive. Recall that the Supply curve is the MC of production. Here, firms are earning profits. Hence E is not true. Option D is also not the right answer. When we talk about market equilibrium, income equality is not relevant. In fact, if income is determined by the demand and supply of labour The wages of workers in different sectors would be different. This is because wages are determined by the demand and supply of labour in each individual sector. Hence, there is no basis to say income is distributed equitably when efficiency is attained. Option C is the correct answer. This is similar to what we have discussed in Question 1. When all relevant costs, including those imposed on others (e.g. pollution), are accounted for The equilibrium determined by the market would be efficient. That is, one cannot be made better off without making others worse off. Q2) The loss in efficiency due to a per-unit tax, represented by S, is measure by the area ? And stems from ? . A) IJC; the trades that do not occur because of the tax. B) IHC; consumer unrest about higher prices. C) HJC; producer dissatisfaction with lower revenues. D) EGJI; wasteful use of the tax revenue by government. E) EAHI; consumers paying more for goods than they are worth. Ans: A Before tax was imposed, the original equilibrium was at point C. The tax shifts Supply leftwards. The new equilibrium is at point I. Price Quantity D S C S I Less quantities are transacted now. CH is the reduction in quantity transacted. Hence, the loss in CS is IHC. And the loss in PS is JHC. Total loss in efficiency is IJC. This is because more quantities could have been traded but are not, due to the tax. Quantity D S C S I Price H J Q3) When the price ceiling is set at $4, what is the total economic surplus? A) $18 B) $20 C) $24 D) $32 E) $48 Ans: C A Price Ceiling at $4. What is the quantity transacted? 4 P Q D S $4 4 The question asks us to calculate the TOTAL ECONOMIC SURPLUS. Total Economic Surplus is the SUM of the Consumer Surplus and Producer Surplus ....
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This note was uploaded on 09/06/2010 for the course FBE ECON1001 taught by Professor Dr.demurger during the Fall '08 term at HKU.

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ps07_sol - Exercise #7 Q1) A market equilibrium is only...

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