b. What is the combined effect of these two programs on the price of cigarettes?
c. Cigarettes are also heavily taxed. What effect does this tax have on cigarette consumption? 10. At Fenway Park, home of the Boston Red Sox, seating is limited to 39,000. Hence, the number of tickets issued is fixed at that figure. Seeing a golden opportunity to raise revenue, the City of Boston levies a per ticket tax of $5 to be paid by the ticket buyer. Boston sports fans, a famously civic-minded lot, dutifully send in the $5 per ticket. Draw a well-labeled graph showing the impact of the tax. On whom does the tax burden fall—the team‘s owners, the fans, or both? Why? 11. A subsidy is the opposite of a tax. With a $0.50 tax on the buyers of ice-cream cones, the government collects $0.50 for each cone purchased; with a $0.50 subsidy for the buyers of ice-cream cones, the government pays buyers $0.50 for each cone purchased.
a. Show the effect of a $0.50 per cone subsidy on the demand curve for ice-cream cones, the effective price paid by consumers, the effective price received by sellers, and the quantity of cones sold.
b. Do consumers gain or lose from this policy? Do producers gain or lose? Does the government gain or lose?
12. In the spring of 2008, Senators John McCain and Hillary Clinton (who were then running for president) proposed a temporary elimination of the federal gasoline tax, effective only during the summer of 2008, in order to help consumers deal with high gasoline prices. a. During the summer, when gasoline demand is high because of vacation driving, gasoline refiners are operating near full capacity. What does this fact suggest about the price elasticity of supply?
b. In light of your answer to (a), who do you predict would benefit from the temporary gas tax holiday?
a. During the summer, when gasoline demand is high because of vacation driving, gasoline refiners are operating near full capacity. What does this fact suggest about the price elasticity of supply?
b. In light of your answer to (a), who do you predict would benefit from the temporary gas tax holiday?
1. Melissa buys an iPod for $120 and gets consumer surplus of $80.
a. What is her willingness to pay?
b. If she had bought the iPod on sale for $90, what would her consumer surplus have been?
c. If the price of an iPod were $250, what would her consumer surplus have been?
2. An early freeze in California sours the lemon crop. Explain what happens to consumer surplus in the market for lemons. Explain what happens to consumer surplus in the market for lemonade. Illustrate your answers with diagrams.
3. Suppose the demand for French bread rises. Explain what happens to producer surplus in the market for French bread. Explain what happens to producer surplus in the market for flour. Illustrate your answers with diagrams. 4. It is a hot day, and Bert is thirsty. Here is the value he places on a bottle of water:
Value of first bottle $7 Value of second bottle 5 Value of third bottle 3 Value of fourth bottle 1
a. From this information, derive Bert‘s demand schedule. Graph his demand curve for bottled water.
b. If the price of a bottle of water is $4, how many bottles does Bert buy? How much consumer surplus does Bert get from his purchases? Show Bert‘s consumer surplus in your graph.
c. If the price falls to $2, how does quantity demanded change? How does Bert‘s consumer surplus change? Show these
changes in your graph.
5. Ernie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water:
Cost of first bottle $1 Cost of second bottle 3 Cost of third bottle 5 Cost of fourth bottle 7
a. From this information, derive Ernie‘s supply schedule. Graph his supply curve for bottled water.
b. If the price of a bottle of water is $4, how many bottles does Ernie produce and sell? How much producer surplus does Ernie get from these sales? Show Ernie‘s producer surplus in your graph.
c. If the price rises to $6, how does quantity supplied change? How does Ernie‘s producer surplus change? Show these changes in your graph.
6. Consider a market in which Bert from Problem 4 is the buyer and Ernie from Problem 5 is the seller.
a. Use Ernie‘s supply schedule and Bert‘s demand schedule to find the quantity supplied and quantity demanded at prices of $2, $4, and $6. Which of these prices brings supply and demand into equilibrium? b. What are consumer surplus, producer surplus, and total surplus in this equilibrium? c. If Ernie produced and Bert consumed one fewer bottle of water, what would happen to total surplus?
d. If Ernie produced and Bert consumed one additional bottle of water, what would happen to total surplus?
7. The cost of producing flat-screen TVs has fallen over the past decade. Let‘s consider some implications of this fact.
a. Draw a supply-and-demand diagram to show the effect of falling production costs on the price and quantity of flat-screen TVs sold.
b. In your diagram, show what happens to consumer surplus and producer surplus. c. Suppose the supply of flat-screen TVs is very elastic. Who benefits most from falling production costs—consumers or producers of these TVs?
8. There are four consumers willing to pay the following amounts for haircuts:
Jerry: $7 Oprah: $2 Ellen: $8 Phil: $5
There are four haircutting businesses with the following costs:
Firm A: $3 Firm B: $6 Firm C: $4 Firm D: $2
Each firm has the capacity to produce only one haircut. For efficiency, how many haircuts should be given? Which businesses should cut hair and which consumers should have their hair cut? How large is the maximum possible total surplus?
9. Suppose a technological advance reduces the cost of making computers.
a. Draw a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the market for computers.
b. Computers and typewriters are substitutes. Use a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the market for typewriters. Should typewriter producers be happy or sad about the technological advance in computers?
c. Computers and software are complements. Draw a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the market for software. Should software producers be happy or sad about the technological advance in computers?
d. Does this analysis help explain why software producer Bill Gates is one of the world‘s richest men?
10. A friend of yours is considering two cell phone service providers. Provider A charges $120 per month for the service regardless of the number
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