First bottle $5 Second bottle Third bottle Fourth bottle Fifth bottle Further bottles 1

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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The many identical residents of Whoville love drinking zlurps. Each of the residents has the following willingness to pay for the tasty refreshment.

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 do 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 the total surplus in Whoville?

d. MayorCrinch imposes a $1tax 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?

First bottle
$5
Second bottle
Third bottle
Fourth bottle
Fifth bottle
Further bottles
1
Transcribed Image Text:First bottle $5 Second bottle Third bottle Fourth bottle Fifth bottle Further bottles 1
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Follow-up Question
ayor 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    support the mayor's policy because it    welfare compared to before the tax.
 
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