5. Problems and Applications Q5 The many identical residents of Whoville love dr

Question

5. Problems and Applications Q5 The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment: Willingness to Pay (Dollars) Quantity First bottle Second bottle Third bottle Fourth bottle Fifth bottle Further bottles 4 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 s 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 $

Explanation / Answer

When price=1.5 then whovillian will consume 4bottles amd consumer surplus=8

Taking $1 as a cost total consumer surplus decreases to 4

Cindy consumer surplus=7.5 and decreases the total surplus

After $1 tax, bottles=3 and per person consumer surplus=4.5 and external cost=3 and govt revenue=3. Total surplus per person is -1.5

Shouldnot support the mayor policy because it decreases welfare compared to before tax.

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