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

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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
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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. LO: 1
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Ch007_4e - Answers to Text Questions and Problems Answers...

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