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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment:

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a. The cost of producing Zlurp is $150, 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. MayorCrinch 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?

Subpart (a):

To determine
Internalizing externality and consumer surplus.

Explanation

Each Whovillian will consume 4 bottles of Zlurp when the price is $1.50 per bottle.

The consumer surplus obtained by each of them is given as follows:

Consumer surplus = Total amount willing to payTotal Spen

Subpart (b):

To determine
Internalizing externality and consumer surplus.

Subpart (c):

To determine
Internalizing externality and consumer surplus.

Subpart (d):

To determine
Internalizing externality and consumer surplus.

Subpart (e):

To determine
Internalizing externality and consumer surplus.

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