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TUTORIAL 7 WEEK 8 EFFICIENCY AND EXCHANGE MONDAY 26 TH APRIL this week is a public holiday. Students in class this day should attend any other tutorial this week. Tutors of Monday classes should not schedule the Submission Question this week. Reading: Text: Ch 7 Ch. 8 (pp211-223) Ch 7 Review Questions: 1, 2, 3, 4 and 6 1 Economists emphasise efficiency because an efficient outcome means that the size of the economic pie, or total surplus, is maximised. This means that all of our other economic goals could potentially be fulfilled to their greatest possible extent. With a larger pie, everyone can have a larger slice. Economists’ support of efficiency as a goal does not, however, mean that they support the existing distribution of income. 2 To ensure that everyone is better off as a result of the policy you could introduce a measure that transfers income from workers to retirees. For example, a policy which transferred $1 million per year from workers to retirees would leave retirees no worse off and workers better off by the tune of $99 million per year as a result. 3 The tax raises revenue for the government and the value of the additional revenue collected must be counted as a gain when evaluating the welfare effect of the tax. This means that the loss associated with the tax will be less than the loss of consumer and producer surplus. 4 False. While it is true that those travellers who volunteer under a compensation scheme to wait for a later flight probably on average have a lower income than those who don’t volunteer, these passengers give up their seats under the voluntary policy only when they find the payment offered sufficient to compensate them for the inconvenience of waiting. Under the first-come, first-served policy there will be low-income passengers who are forced to wait, but who receive no compensation. 6 False. A tax on an activity that causes harm to people other than those directly involved in the activity can increase efficiency by simultaneously generating government revenue and discouraging people from undertaking the activity.
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Problems: 1, 2, 5, 8 and 9 1 a Consumer surplus is the triangular area between the demand curve and the price line. Its area is equal to 0.5bh, where b is the base of the triangle and h is the height. In this example, the base is 6 units and the height is 1.5 units, measured in dollars. Therefore, consumer surplus is: 0.5($1.50/unit)(6 units/week), or $4.50 per week. b
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This note was uploaded on 12/31/2011 for the course ECON 1101 taught by Professor Julia during the Three '08 term at University of New South Wales.

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