5-Discussion Questions

5-Discussion Questions - b How many people would cross the...

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Lecture 5: Consumer Theory (III) Suggested questions and exercises (Pindyck and Rubinfeld, Ch.4). Questions: 9 Exercises: 13 QUESTIONS 9. Suppose that the average household in a state consumes 800 gallons of gasoline per year. A 20-cent gasoline tax is introduced, coupled with a $160 annual tax rebate per household. Will the household be better or worse off under the new program? EXERCISES 13. Suppose you are in charge of a toll bridge that costs essentially nothing to operate. The demand for bridge crossings Q is given by P 15 1 2 Q . a. Draw the demand curve for bridge crossings.
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Unformatted text preview: b. How many people would cross the bridge if there were no toll? c. What is the loss of consumer surplus associated with a bridge toll of $5? a. The toll bridge operator is considering an increase in the toll to $7. At this new higher price, how many people would cross the bridge? Would the toll bridge revenue increase or decrease? What does your answer tell you about the elasticity of demand? b. Find the lost consumer surplus associated with the increase in the price of the toll from $5 to $7....
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