answerkey ch7 3ed - Answers to Text Questions and Problems...

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Answers to Text Questions and Problems in Chapter 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. The proposed policy will make retirees better off by $10 million per year but will make workers worse off by $1 million per year. To assure that everyone is better off, this policy could be combined with a measure that makes workers better off by at least $1 million per year and makes retirees worse off by less than $10 million per year. 3. More inelastic demand or supply increases the size of the economic surplus in a perfectly competitive market. 4. The less elastic is supply, the smaller is the loss of economic surplus caused by a price ceiling, due to the much smaller response to a reduction in price. 5. The less elastic is supply, the larger is the distributive impact of a price ceiling. 6. 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. 7. Price supports encourage producers to expand production beyond the point at which the marginal cost of production is equal to its marginal benefit (i.e., 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 1. The equilibrium price is $14 per unit, so consumer surplus is (26–14) + (24–14) + (22–14) + (20–14) + (18–14) + (16–14) = $42. Producer surplus is (14–2) + (14–4) + (14–6) + (14–8) + (14–10) + (14–12) = $42. Total economic surplus is $84. 2. Price Supply 12 10.50 6 Demand 6 Quantity
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a. Consumer surplus is the triangular area between the demand curve and the price line. Its area is equal to ½ × b × h , 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)($1.5)(6), 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)(6), or $13.50 per week. c. The maximum weekly amount that consumers and producers together would be willing to pay to trade in wristwatches is the sum of gains from trading in wristwatches—namely, the total economic surplus generated per week, which is $18 per week. 3a. 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 wristwatches. b.
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This note was uploaded on 07/30/2011 for the course ECON 1101 taught by Professor Julia during the Three '08 term at University of New South Wales.

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answerkey ch7 3ed - Answers to Text Questions and Problems...

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