Homework 5

Intro Micro--

1. Imagine the state legislature is considering an excise tax on both coffee and popsicles. For this question assume that the two products have similar supply curves.

   1. Draw graphs of both markets showing the effect of the tax. Explain briefly why you drew the curves as you did (i.e. in which market demand is more elastic). Be sure to indicate what portion of the tax is paid by consumers and what portion is paid by producers. Answer to 1(a)

   2. Assume that the dollar value of total sales for popsicles and coffee was the same before the tax, in which market will the most tax revenue be raised? Explain. Show the amount of revenue on the graphs. Answer to 1(b)

   3. Show the amount of consumers' and producer's surplus lost in each market. In which do consumers lose the greater surplus? Explain. In which do producers lose the greater surplus? Explain. Answer to 1(c)

   4. Show the total deadweight loss in each market. In which is it smaller? Explain. Answer to 1(d)

   5. In which market would you expect the greater opposition to the tax from producers? Why? In which market would you expect the greater opposition to the tax from consumers? Answer to 1(e)

2. Consider the cost curves for a small soft drink bottling plant:

   1. Draw marginal cost, average total cost, and average variable cost curves that might be reasonable for a soft drink bottler. Pick some level of output, label it Q*. and show on the vertical axis the marginal cost, average total cost, and average variable cost for that level of output. Answer to 2(a)

   2. On the same graph show the areas that are equal to total cost, total variable cost and total fixed cost for Q*. Answer to 2(b)

   3. On a separate graph redraw the original curves. On this same graph show what curves shift and in what way they shift if the cost of the glass used in soda bottles falls. Answer to 2(c)

   4. On a separate graph redraw the original curves. On this same graph show what curves shift and in what way they shift if property taxes on the plant increase. Answer to 2(d)

   5. On a separate graph redraw the original curves. On this same graph show what curves shift and in what way they shift if an increase in air pollution reduces the productivity of the workers at the bottling plant. Answer to 2(e)

   The following table gives Nancy's total utility (measured in dollars) for consuming peanut butter sandwiches.

   Nancy's total utility (in $) from consuming peanut butter sandwiches.
   Sandwiches	Total Utility
   1	0.50
   2	0.90
   3	1.20
   4	1.35

3. Based on the information in Table 1, how many sandwiches would Nancy buy if sandwiches are $0.65 each? What is the value of her consumer surplus? Answer to 3(a)

4. How many sandwiches would Nancy buy if sandwiches are $0.35? What is the value of her consumer surplus? Answer to 3(b)

5. What is the range of prices for which Nancy would buy three sandwiches? Answer to 3(c)