Answer+Key+to+HW4 - Answer Key Homework #4 March 25, 2010...

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Answer Key Homework #4 March 25, 2010 1) See Figure 1 The price ceiling (pc) on gasoline reduces welfare by the areas abd + bcd. The new consumer surplus is area gacf, and producer surplus falls to area fch. Figure 1: Problem 1 2) Owners of existing billboards would not oppose the ban because it cre- ates an entry barrier and so also market power for existing sellers. Producers would then be able to set prices above marginal cost, and transfer some of the consumer surplus to producers. Exclusive of external e/ects, welfare will fall, as a deadweight loss is created. The consumers are the purchasers of billboard space. The producers are billboard owners. Welfare is improved if the increase in billboards was creating a negative externality by making the scenery less enjoyable. 3) See Figure . At the original price, P0 , consumer surplus is A + B + C, and producer surplus is E + F. If o¢ cials want to reduce the number of visits to 1
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Q*, they can either increase the price to P1, which reduces consumer surplus by B + C, or they can institute a quota and leave the price unchanged. With the quota, consumers retain area A + B, and area C is deadweight loss. Area F is eliminated under either scenario. Assuming the park is charging marginal cost for admission, which is constant, there are no welfare e/ects from the change in
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Answer+Key+to+HW4 - Answer Key Homework #4 March 25, 2010...

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