Ch007_4e - Answers to Text Questions and Problems Answers...

Answers to Text Questions and Problems
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 therefore favor efficient
policies because such policies make additional resources available for the pursuit of
other goals.
LO: 1
AACSB: Analytical Skills
Bloom’s: Understanding
2.
If enacted, the proposed policy will not, by itself, make everyone better off.
However, suppose the policy is combined with a tax on workers that is used to pay
for a $5 million per year increase in Social Security payments for retirees. This
combination will make everyone better off since economic surplus for retirees will
rise by $4 million ($5 million in increased Social Security payments minus $1
millions of lost surplus from enacting the new policy) and for workers by $94 million
($100 million in increased surplus minus $5 million in taxes to pay for the increased
Social Security payments.)
LO: 2
AACSB: Analytical Skills
Bloom’s: Application
3.
The loss experienced by participants in the market for a taxed good will be offset in
part by the benefits received by other citizens from the public goods purchased with
the resulting tax revenue.
LO: 4
AACSB: Analytical Skills
Bloom’s: Understanding
4.
The compensation policy encourages those who have the lowest opportunity cost
from waiting to volunteer to wait. By contrast, the first-come, first-served policy
often inconveniences those who face much higher opportunity costs.
LO: 3
AACSB: Analytical Skills
Bloom’s: Analysis
5.
Price ceilings induce sellers to reduce production below the point at which the
marginal cost of the last unit produced is equal to its marginal benefit of the last unit
purchased (i.e. the point at which supply and demand intersect). This means that
additional output could be produced at marginal costs that are less than what buyers
would be willing to pay for it.
LO: 3
AACSB: Analytical Skills
Bloom’s: Analysis

Answers to Problems
1.
Analyzing the market for DVDs in Lincoln, Nebraska:
a.
Consumer surplus is the triangular area between the demand curve and the
equilibrium price. Its area is equal to 0.5bh, 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($1.50/unit)(6 units/week) = $4.50
per week.
b.
Producer surplus is the triangular area between the equilibrium price and the
supply curve. Using the base-height formula, it is (0.5)($4.50/unit)(6
units/week) = $13.50 per week.
c. The maximum weekly amount that consumers and producers together would
be willing to pay to trade in used DVDs is the sum of gains from trading in
used DVDs—namely, the total economic surplus generated per week, which is
$18 per week.