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Microeconomics
Homework 3
Consumer/producer surplus, price controls, taxes.
1. According to the graph, marginal cost for Java Joe's increases by $0.50 for
each additional cup of coffee it produces. The first cups costs $0.75.
Suppose the market price for coffee is $2.25.
a. How many cups of coffee will Java Joe's sell?
b.
What is the value of the producer surplus Java Joe's receives for each
cup of coffee it sells?
2. Consider a market with 10 consumers, each of whom will buy at most one
pair of sandals. The distribution of buyer values (maximum the buyer is
willing to pay) for these consumers is as follows:
Buyer Value
$10
$20
$30
$40
Number of Buyers
3
4
1
2
a. If the price of sandals is $25 per pair, how many pairs will be demanded?
b. What is total consumer surplus at this price?
3. The picture shows equilibrium in the rental market for 1BR
apartments in NYC.
a. How many apartments are rented and at what price?
b. What area represents consumer surplus? Calculate it.
c. What area represents producer surplus? Calculate it.
d. Suppose the government imposes a rent control at $1000. Mark
the resulting consumer surplus, producer surplus and the
deadweight loss.
4. The best example of a price ceiling is
a. minimum wage
b. minimum purchase requirement
c. rent controls
d. minimum age for alcohol consumption
5. A good example of a price floor is
a. minimum wage
b. rent control
c. free tickets to Saturday Night Live show
d. agricultural subsidies to farmers
6. Maria values the math book that she bought at the start of the semester for $40 at only $15 today, and its sell-back price
at the Co-op is just $10. Amy, who values the book at $25, offers Maria $20 to buy the book. Is selling the book to Amy
for $20 an efficiency improvement?
7. Which is a Pareto improvement?
a. The United Nations bans the use of coal in electricity production worldwide.
b. Your professor decides to give Bs to everyone in the class.
c. You give a used unwanted television to Goodwill Industries.
d. A burglar breaks into a house and steals the TV.
e. You pay the city a fine for a parking ticket.
8. The graph shows the effect of a new $5 tax per bottle of wine.
a.
Supply curve
after tax
Price
What is the market price and quantity sold before tax?
Supply curve
before tax
$5 tax
b.
Mark the area that represents total tax revenue collected by
the government. Calculate the amount.
20
18
15
c.
How much of this $5 tax is paid by buyers?
$5 tax
Demand curve
d.
How much is paid by sellers?
10
20
30
e. Mark area that represents the deadweight loss of this tax.
9. The figure illustrates the markets for two goods, Good X and Good Y. Suppose an identical dollar tax is imposed in
each market, as shown.
a. Compare the consumer burden and producer burden in each market.
b. If the goal of the government is to raise revenue with minimum impact to quantity consumed, in which market
should the tax be imposed?
c. If the goal of the government is to discourage consumption, in which market should the tax be imposed?
10. Explain what economists mean by “the deadweight loss of Christmas” and how it can be reduced.
Quantity