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ECON 212

Exam #3 Practice Problems


1. The following graph depicts the jellybean market in the country of Kawmin

a.

In the domestic country of Kawmin, if they do not allow trade, what is the consumer,
producer and total surplus?

b.

Kawmin then opens the market to trade. The World Price for jellybeans is $1 per bag.
Below is the graph depicting the market with world trade. What is the new equilibrium
price, quantities of consumption and production, imports, consumer surplus, producer
surplus and total surplus?

c.

Using the same graph, suppose the Czar of Kawmin puts a $1 tariff per bag on jellybean
imports. Calculate the equilibrium price, quantities of consumption and production,

imports, consumer surplus, producer surplus, government revenue, total surplus and
deadweight loss due to the tariff.

2. The many identical residents of Whoville love drinking Zlurp. Each resident has the
following willingness to pay for the tasty refreshment:
First bottle: $5
Further Bottles: $0

Second bottle: $4 Third Bottle: $3 Fourth Bottle: $2 Fifth Bottle: $1

a. The cost of producing Zlurp is $1.50 and the competitive sellers sell at this price. (The supply
curve is horizontal.) How many bottles will each Whovillian consume? What is each persons
consumer surplus?
b. Producing Zlurp creates pollution. Each bottle has the 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 in Whoville, decides on her own to reduce her
consumption of Zlurp by one bottle. What happens to Cindys welfare (her consumer surplus
minus the cost of pollution she experiences)? How does Cindys decision affect total surplus in
Whoville?
d. Mayor Grinch imposes a $1 tax on Zlurp. What is the consumption per person now?
Calcuate consumer surplus, the external cost, government revenue, and total surplus per person.
e. Based on your calculations, would you support the mayors policy? Why or why not?

3. Think about the goods and services provided by your local government.
a. Using the classification in Figure 1 of your textbook, explain which category each of the
following goods falls into:
police protection, snow plowing, education, rural roads, city streets
b. Why do you think the government provides items that are not public goods?

Answers
1. a.

Figure 11 shows the market for jelly beans in Kawmin if trade is not allowed.
The market equilibrium price is $4 and the equilibrium quantity is 4.
Consumer surplus is $8, producer surplus is $8, and total surplus is $16.

b. Since the world price is $1, Kawmin will become an importer of jelly beans.
Figure 12 shows that the domestic quantity supplied will be 1, quantity
demanded will be 7, and 6 bags will be imported. Consumer surplus is $24.50,
producer surplus is $0.50, so total surplus is $25.

Figure 12

c. The tariff raises the world price to $2. This reduces domestic consumption to 6
bags and raises domestic production to 2 bags. Imports fall to 4 bags (see
Figure 12). Consumer surplus is now $18, producer surplus is $2, government
revenue is $4, and total surplus is $24.

2. a.

At a price of $1.50, each Whovillian will consume 4 bottles of Zlurp. Each


consumers total willingness to pay is $14 (= $5 + $4 + $3 + $2). The total
spent by each Whovillian on Zlurp is $6 (= $1.50 4). Therefore, each
consumer receives $8 in consumer surplus (=$14 $6).

b. Total surplus would fall by $4 to $4.


c. If Cindy Lou only consumes 1 bottle of Zlurp, her consumer surplus is $2.50 (=
$5 $1.50 $1). Cindys decision reduces consumer surplus in Whoville by
$1.50.
d.

The $1 tax raises the price of a bottle of Zlurp to $2.50. (The entire tax will be
borne by consumers because supply is perfectly elastic.) Each resident will
purchase only 3 bottles at the higher price and each consumers total willingness
to pay is now $12 (= $5 + $4 + $3). The private cost of the bottles for each
resident is $7.50 (= $2.50 3). The external resident per resident is $3.
Government revenue per resident is also $3. Total surplus per person is $4.50.
e. Yes, because total surplus is now higher than before the tax.

3. a.

(1) Police protection is a club good because it is excludable (the police may
ignore some neighborhoods) and not rival in consumption. You could make an
argument that police protection is rival in consumption, if the police are too
busy to respond to all crimes, so that one person's use of the police reduces
the amount available for others. In that case, police protection is a private
good.

(2) Snow plowing is most likely a common resource. Once a street is


plowed, it is not excludable. But it is rival in consumption, especially
right after a big snowfall, because plowing one street means not
plowing another street.

(3) Education is a private good (with a positive externality). It is


excludable, because someone who does not pay can be prevented
from taking classes. It is rival in consumption, because the presence of
an additional student in a class reduces the benefits to others.

(4) Rural roads are public goods. They are not excludable and they are
not rival in consumption because they are uncongested.

(5) City streets are common resources when congested. They are not
excludable, because anyone can drive on them. But they are rival in
consumption, because congestion means that every additional driver
slows down the progress of other drivers. When they are not
congested, city streets are public goods, because they are no longer
rival in consumption.

b. The government may provide goods that are not public goods, such as
education, because of the externalities associated with them.

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