Question

The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment:
Quantity Willingness to Pay (Dollars)
First bottle 5
Second bottle 4
Third bottle 3
Fourth bottle 2
Fifth bottle 1
Further bottles 0
The cost of producing a bottle of Zlurp is $1.50, and the competitive suppliers sell it at this price. (The supply curve is horizontal.)
Each Whovillian will consume _____ bottles and receive a consumer surplus of $_____.
Producing Zlurp creates pollution. Each bottle has an external cost of $1.
Taking this additional cost into account, total surplus per person in the allocation you previously determined decreases to $_____.
Cindy Lou Who, one of the residents of Whoville, decides on her own to reduce her consumption of Zlurp by 1 bottle.
Cindy's consumer surplus (ignoring the cost of pollution she experiences) is now $_____. Her decision _____ (Increases or Decreases) total surplus in Whoville by $_____.
Mayor Grinch imposes a $1 tax on each bottle of Zlurp.
Consumption per person is now_____bottles. This yields a per-person consumer surplus of $_____not including the cost of pollution, a per-person external cost of $_____, and government revenue of $_____ per person. Total surplus per person is now $_____as a result of this policy. (Hint: Total surplus is equal to consumer surplus minus the external cost of pollution plus government revenue.)
Based on your calculations, you _____ (Would or Would not) support the mayor's policy because it _____ (Increases or Decreases) welfare compared to before the tax.

Answer 1

Answer and Explanation:

The computations are given below:

1) This 4 is chosen because the marginal benefit will be less than the marginal cost and if it wants to go above that, the price of the drink is greater than the willingness to pay

2) The consumer surplus is  

= (5 - 1.5) + (4 - 1.5) + (3 - 1.5) + (2 - 1.5)

= 8

3) Total surplus decreases to

As we know that

= Consumer surplus - external cost

= 8 - 4

= 4

4) Now Cindy's Consumer surplus is  

= (5 - 1.5) + (4 - 1.5) + (3 - 1.5)

= 7.5

5) Increases

6) 8 - 7.5 = 0.5

7) Consumption = 3 bottles

8) Consumer surplus is

= (5 - 2.5) + (4 - 2.5) + (3 - 2.5)

= 4.5

9) External cost = 3  × 1 = 3 bottle

10) Government revenue  = 3  × 1 = 3 bottle

11) Total surplus is

As we know that

= Consumer surplus - external cost of pollution + government revenue

= 4.5 - 3 + 3

= 4.5

12) would

13) increases