EC 201 Midterm 2

Buyer Willingness To Pay Calvin $150.00 Sam $135.00 Andrew $120.00 Lori $100.00 If the price of the product is $122, then the total consumer surplus is

$41 Calvin: 150 - 122 = $28 Sam: 135 - 122 = $13 total CS = 28 + 13 = $41

In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. The price paid by buyers increases by $2 and the after-tax price received by sellers falls by $3. The government is able to raise $750 per month in revenue from the tax. The deadweight loss from the tax is

$125 -the equilibrium quantity after the tax = 750/5 = 150 -the equilibrium quantity decreases by 50 units -DWL = 1/2 x 5 x 50 = 125

For widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $15 per unit is imposed on widgets. The tax reduces the equilibrium quantity in the market by 300 units. The deadweight loss from the tax is

$2,250 DWL = 1/2 x 15 x 300 = 2250

At Nick's Bakery, the cost to make homemade chocolate cake is $4 per cake. As a result of selling five cakes, Nick experiences a producer surplus in the amount of $17.50. Nick must be selling his cakes for

$7.50 each PS per cake = 17.5/5 = $3.5 per cake price = PS +cost = 3.5 +4 = $7.50

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.

-freeze = supply of lemon shift left -supply for lemon shifts to the left = price increases -input price for lemonade increases -supply curve of lemonade shifts to the left

Kristi and Rebecca sell lemonade on the corner for $0.50 per cup. It costs them $0.10 to make each cup. On a certain day, their producer surplus is $20. How many cups did Kristi and Rebecca sell?

50 PS per cup: 0.5 - 0.1 = 0.4 # of cups = total PS/PS per cup = 20/0.4 = 50

Suppose that a market is described by the following supply and demand equations: QS = 2P ; QD = 300 - P a) Solve for the equilibrium price and the equilibrium quantity. b) Suppose that a tax of $15 per unit is placed. 1/3 of the tax is paid by the seller and 2/3 of the tax is paid by the buyer. Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold? c) Use your answer from part (b) to solve for tax revenue and the deadweight loss of this tax. Then graph the market with tax. Make sure to clearly label the price received by sellers, the price paid by buyers, the equilibrium quantity, producer surplus, consumer surplus, tax revenue, and the deadweight loss.

a) price = $100 ; quantity = 200 set equations equal to each other than use answer of price in QS equation b) 15 x 2/3 = 10 price paid by buyers; 100 + 10 = $110 15 x 1/3 = 5 received by sellers; 100 - 5 = $95 thus quantity sold = 2 x 95 = 190 c) tax revenue = 190 x 15 = $2850 DWL = 1/2 x 10 x 15 = $75

4. Which of the following scenarios is not consistent with the Laffer curve? a. The tax rate is very low, and tax revenue is very low. b. The tax rate is very high, and tax revenue is very low. c. The tax rate is very high, and tax revenue is very high. d. The tax rate is moderate (between very high and very low), and tax revenue is relatively high.

c.

if the labor supply curve is nearly vertical, a tax on labor a. has a large deadweight loss. b. raises a small amount of tax revenue. c. has little impact on the amount of work that workers are willing to do. d. results in a large tax burden on the firms that hire labor.

c.

1. The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $20, and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam Smith's The Wealth of Nations while on vacation, the president decides to open the Textilian market to international trade. The market price of a T-shirt falls to the world price of $16. The number of T-shirts consumed in Textilia rises to 4 million, while the number of T-shirts produced declines to 1 million. a. Illustrate the situation just described in a graph. Your graph should show all the numbers. b. Calculate the change in consumer surplus, producer surplus, and total surplus that results from opening up trade. (Hint: Recall that the area of a triangle is ½ × base × height.)

check notebook

a demand curve reflects each of the following except the a. willingness to pay of all buyers in the market. b. value each buyer in the market places on the good. c. highest price buyers are willing to pay for each quantity. d. ability of buyers to obtain the quantity they desire

d.