The many identical residents of Whoville lovedrinking Zlurp. Each resident has the followingwillingness to pay for the tasty refreshment:First bottle $5Second bottle 4Third bottle 3Fourth bottle 2Fifth bottle 1Further bottles 0a. The cost of producing Zlurp is $1.50, and thecompetitive suppliers sell it at this price. (Thesupply curve is horizontal.) How many bottleswill each Whovillian consume? What is eachperson’s consumer surplus?b. Producing Zlurp creates pollution. Each bottle hasan external cost of $1. Taking this additional costinto account, what is total surplus per person inthe allocation you described in part (a)?c. Cindy Lou Who, one of the residents of Whoville,decides on her own to reduce her consumptionof Zlurp by one bottle. What happens to Cindy’swelfare (her consumer surplus minus the cost ofpollution she experiences)? How does Cindy’sdecision affect total surplus in Whoville?d. Mayor Grinch imposes a $1 tax on Zlurp. Whatis consumption per person now? Calculateconsumer surplus, the external cost, governmentrevenue, and total surplus per person.e. Based on your calculations, would you supportthe mayor’s policy? Why or why not?
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
supply curve is horizontal.) How many bottles
will each Whovillian consume? What is each
person’s
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?
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