Principles of Economics assignment. 5
find assignment in the attachment.
6. The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness ?to pay for the tasty refreshment:
First bottle $5
Second bottle 4
Third bottle 3
Fourth bottle 2
Fifth bottle 1
Further bottles 0
a. The cost of producing Zlurp is $1.50; and the competitive suppliers sell it at this price. (The sup- ply 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 consumer 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?
10. There are three industrial firms in Happy Valley.
Firm Initial Pollution Level Cost of Reducing Pollution by 1 Unit
A 70 units $20
B 80 units $25
C 50 units $10
The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits.
a. Who sells permits and how many do they sell? ?Who buys permits and how many do they buy? Briefly explain why the sellers and buyers are each willing to do so. What is the total cost of pollution reduction in this situation? ?
b. How much higher would the costs of pollution reduction be if the permits could not be traded? ?
5. Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch. Here is their willingness to pay for each film: ?
Judd Joel Gus Tim
First film $7 $5 $3 $2
Second film 6 4 2 1
Third film 5 3 1 0
Fourth film 4 2 0 0
Fifth film 3 1 0 0
a. Within the dorm room, is the showing of a movie a public good? Why or why not? ?
b. If it costs $8 to rent a movie, how many movies should the roommates rent to maximize total surplus? ?
c. If they choose the optimal number from part (b) and then split the cost of renting the movies equally, how much surplus does each person obtain from watching the movies? ?
d. Is there any way to split the cost to ensure that everyone benefits? What practical problems does this solution raise? ?
e. Suppose they agree in advance to choose the efficient number and to split the cost of the movies equally. When Judd is asked his willing- ness to pay, will he have an incentive to tell the truth? If so, why? If not, what will he be tempted to say? ?
f. What does this example teach you about the optimal provision of public goods? ?
8. The nation of Wiknam has five million residents whose only activities are producing and consuming fish. They produce fish in two ways. Each person who works on a fish farm raises 2 fish per day. Each person who goes fishing in one of the nation’s many lakes catches X fish per day. X depends on N, the number of residents (in millions) fishing in the lakes. In particular, if N million people fish in the lakes, each catches X = 6 – N fish. Each resident is attracted to the job that pays more fish, so in equilibrium the two jobs must offer equal pay.
a. Why do you suppose that X, the productivity of each ?fisherman, falls as N, the number of fishermen, rises? What economic term would you use to describe the fish in the town lakes? Would the same description apply to the fish from the farms? Explain. ?
b. The town’s Freedom Party thinks every individual should have the right to choose between fishing in the lake and farming without government interference. Under its policy, how many of the residents would fish in the lakes and how many would work on fish farms? How many fish are produced? ?
c. The town’s Efficiency Party thinks Wiknam should produce as many fish as it can. To achieve this goal, how many of the residents should fish in the lakes and how many should work on the farms? (Hint: Create a table that shows the number of fish produced—on farms, from the lake, and in total—for each N from 0 to 5.) ?
d. The Efficiency Party proposes achieving its goal by taxing each person fishing in the lake by an amount equal to T fish per day. It will then distribute the proceeds equally among all Wiknam residents. (Fish are assumed to be divisible, so these rebates need not be whole numbers.) Calculate the value of T that would yield the outcome you derived in part (c). ?
e. Compared with the Freedom Party’s hands-off policy, who benefits and who loses from the imposition of the Efficiency Party’s fishing tax?
10. High-income people are willing to pay more than lower-income people to avoid the risk of death. For example, they are more likely to pay for safety features ?on cars. Do you think cost–benefit analysts should take this fact into account when evaluating public projects? Consider, for instance, a rich town and a poor town, both of which are considering the installation of a traffic light. Should the rich town use a higher dollar value for a human life in making this decision? Why or why not?
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