Question

are has problems. Signature $5 5. The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment: First bottle Second bottle Third bottle Fourth bottle 2 Fifth bottle Further bottles The cost of producing Zlurp is $1.50, and the competitive suppliers sell it at this price. (The supply curve is horizontal.) How many bottles will each Whovillian consume? What is each person's consumer surplus? b. Producing Zlurp creates pollution. Each bottle has an external cost of $1. Taking this additional cost into account, what is total surplus per person in the allocation you described in part (a)? C. Cindy Lou Who, one of the residents of Whoville, decides on her own to reduce her consumption of Zlurp by one bottle. What happens to Cindy's welfare (her consumer surplus minus the cost of pollution she experiences)? How does Cindy's decision affect total surplus in Whoville? d. Mayor Grinch imposes a $1 tax on Zlurp. What is consumption per person now? Calculate con- sumer surplus, the external cost, government revenue, and total surplus per person. e. Based on your calculations, would you support the mayor's policy? Why or why not?

Answer 1

. Given a) How many bottels will each whoxillian each person's consumar Supley? consume? what is Heous Each who villian will conjume 4 bottle and realive a conyumar Scripley of $8. => Working & The consumon's total willing eny to pay is $14 (= $5+$4+$3+$2). The total spent by each whorillian on zlump 19 $6 (= $ 1.50*4). Hence , each. coryumen receives $8 (=$4986) in conyumpor .بلباورال b. Each pea poyon bottle has an external cost of $1. What is total surpley in the allocation you described in part (a)? itere - Taking this additional cost into account, the total scopley per person in the allocation you previously deformined decorate to st4. Working Total scomply would fall by $4 to $4.

(1) How does cindy's desision affect total Supley in whaille ? . Herlin the cindy's consumer Surpley Cignoring the cost of polution she expecuences) is now $4.50. Heer decision incrage total Surphy in whovillian by 0.50 Working Cindy's Willingness to pay for 3 , bottle is - $12 = ($5+$4+$3). She pays $4.50 (= $1.50x3) and the externality is $3-$1x3). This, cindy Lou's consumar surpley is $4.50(= $12 - $4.50- $3.00). Heor decision in corak coryumer Suspley in whouille by $0.50 ($ 4,50 - $4.00) Herre (d) consumption per person is now 3 bottles. => This yeilds a per-porou coryumner soplay. Of $4.50 not including the cost of pollution, a por person external cost of $3 and government revenue of $3 por poyon Total surpley por-poyon is how. $50 as a agult of this palicy. Working. The $1 fan increase the price of a bottle of zlop to $2.50. Now each resident will porchase only 3 bottle.

Incoreased price and each consumer's total willing erys to pay is now - $5+ $4+$3 = $12. fach geident pay $2.50*9 =4.30:Thes, each resident receive $12-$7.50 -44.50 in coryumo scoplus. - Each bottle has an external cost of $1 the per resident external cost is $1 per bottle * 3 bottees $3. The government collect $3 peor gaident in revenue, as a result total surply with the tax is caual $4.500 = $4.50- $3.00 +$3) Here (C) Bayed on your calculatory you will suppout the mayor's policy because it increase welfare compared to before the tax. Working in of the total surpley is now higher than before the dan.