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ECON205 - Homework10 - S09

# ECON205 - Homework10 - S09 - cfw/~'I> 1 Pareto Improvements...

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{/~.'I>.. 1. Pareto Improvements /' Late every night, in an urban neighborhood full of residential apartments, 100 motorcyclists race by and wake everyone up. There is an alternate route around the city that would disturb no one, but it's a little out of the way, and each motorcyclist would need to be paid \$6 per trip to make it worth his or her while to use that route. In the residential urban neighborhood itself, there are 1,000 residents, and each would be willing to pay \$1 per night to not be awakened by the motorcycles. Which of the following would be a Pareto improvement? Check all that apply . ./ D The motorcyclists use the alternate route, and each motorcyclist is compensated \$15 per night from a special neighborhood fund collected from the residents . ./ D The motorcyclists are forced to use the alternate route, without any compensation . ./ 00 The neighborhood residents each contribute 70 cents per night to a special residents' fund. Every night, the total amount in the fund is divided equally among the motorcyclists, who all take the alternate route. Explanation: Close A A Pareto improvement is a change that makes at least one person better off and harms no one. In order for each of the 100 motorcyclists to be paid \$15 each night, the neighborhood fund would have to raise \$15 x 100 = \$1,500 . With 1,000 residents, the average contribution required would be \$1.50 per night. But this is more than it is worth to the residents to not be bothered by the motorcyclists. So paying each motorcyclist \$15 would not be a Pareto improvement. Forcing the motorcyclists to use the alternative route without any compensation harms the motorcyclists, so that is not a Pareto improvement. Finally, consider the remaining solution. If the neighborhood residents each contribute 70 cents per night to the fund and the motorcyclists take the alternate route, the residents come out ahead because the quiet is worth \$1 per night, but each has to contribute only 70 cents. The motorcyclists also come out ahead. The total collected from the residents each night is 70 cents x 1,000 = \$700. T teO 1 0 \,,1 a Inc I I 9 ts IPSE vpd Points: 3 Average: 3/3

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2. Welfare analysis - Basicconcepts Which of the following statements best captures the concept of consumer surplus? ,,@ Even though I was willing to pay up to \$120 for a watch, I bought a watch for only \$100. o I paid \$120 for a watch last week. This week, the same store is selling watches for \$100. o I sold a watch for \$100, even though I was willing to go as low as \$80 in order to sell it. o Even though I was willing to pay up to \$120 for a watch, and even though the seller was willing to go as low as \$100 in order to sell it, we couldn't reach a deal because the government has imposed a tax of \$25 on the sale of watches. Explanation: Close /\. Consumer surplus is the difference between a buyer's willingness to pay (what the item is worth to the buyer) and the price the buyer actually pays. The watch buyer gained a surplus of \$20, which is the difference between the buyer's willingness to pay (\$120) and the price the buyer actually paid (\$100).
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ECON205 - Homework10 - S09 - cfw/~'I> 1 Pareto Improvements...

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