# WA-2 Micro - La Rosa1 Melissa La Rosa Dr Salloum...

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La Rosa1 Melissa La Rosa Dr. Salloum Microeconomics 2/7/12 Written Assignment #2 Producer surplus is the difference between the amounts that a producer of a good receives, the minimum they would be willing to accept for the good. The surplus amount is the benefit that the producer receives for the good sold. Producer surplus is measured by subtracting the amount the producer received by the amount it was willing to accept, outcome is the producer surplus. The relationship between the cost to sellers and the supply curve is that the relationship is positive, so that when price increases so does quantity supplied, there are exceptions. Hence there is no law of supply that parallels the law of demand. If one of the factors that is held constant changes, the relationship between price and quantity, (supply) will change. If the price of an input falls, for example, the supply relationship may change, and the same changes can be shown on a graph that shows the supply curve shifting to the right. When the price of a good rises, the total producer surplus increases because: gains of producers who would have supplies the good even at original price, lower the price and additional gains are realized because new suppliers are inducted to supply of the good at the higher price, when the price of a good then falls, the total producers surplus falls as well. Business Haircut Price: A Kutz \$3.00 B Kutz \$6.00 C Kutz \$4.00 D Kutz \$2.00 Consumer Willing to Pay: Ricki \$8.00

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La Rosa2 Oprah \$7.00 Jerry \$5.00 Montel \$2.00 In the most efficient world, companies A & D Kutz should cut hair and Ricki and Oprah should be receiving the haircuts. The maximum total surplus is \$17.00 and that will be going to Ricki, The least possible total surplus received was by Montel, if he was to get haircuts from D Kutz he would not make any due to his willingness to pay of \$2.00 dollars is the same as the price of one haircut. This curve shows the relationship between tax rates and tax revenue collected by governments. The chart below shows the Laffer curve: The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government. Laffer explains the model in terms of two interacting effects of taxation: an "arithmetic effect" and an "economic effect". The "arithmetic effect" assumes that tax revenue raised is the tax rate multiplied by the revenue available for taxation (or tax base). At a 0% tax rate, the model assumes that no tax revenue is raised. The "economic effect" assumes that the
La Rosa3 tax rate will have an impact on the tax base itself. At the extreme of a 100% tax rate, the government theoretically collects zero revenue because taxpayers change their behavior in

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