ECO 108 Introduction to Economics-BB Assignment 2 SBU ID: Name: Present all final answers neatly on these provided pages. Show any relevant calculations neatly. 1 Use the following table to answer the question below (Multiple Choice Question). The table above provides reservation prices and costs for the inhabitants of Econland. Suppose we have an allocation where D3, D4, D5, D6, and D7 each consume a widget and S1, S2, S3, S4, and S5 each produce a widget. This is not Pareto efficient because 1) S10 can produce a widget for D2, and D2 can give $8.50 to S10, and both are better off. 2) the quantity is below the socially efficient level. 3) D4 can give his widget to D2, and D2 can give $7 to D4, and both are better off. 4) D7 can give his widget to D1, and D1 can give $9.5 to D7, and both are better off. 5) None of the above. 2 Pareto Efficiency and First Welfare Theorem (a) Write down the three general principles for an efficient allocation. (b) Write down the First Welfare Theorem. (c) (True/False) Is the following statement true or false? Explain. Suppose an allocation is Pareto efficient. This implies that consumer surplus is equally divided among all the D people who consume, and producer surplus is equally divided among all the S people who produce. 3 Elasticity and Tax: For questions (a) and (b), please indicate whether the statement is True or False and explain. (a)(True/False) Suppose supply is perfectly inelastic and demand the demand elasticity equals 1. Then there is no deadweight loss in total surplus from a tax. Draw a graph to explain. (b) (True/False) Suppose demand is perfectly elastic and the supply elasticity equals 1. Then there is no deadweight loss in total surplus from a tax. Draw a graph to explain.(Hint: Demand curve is horizontal and supply curve is upward sloping) 4 Refer to the diagram above for the following questions. The diagram gives information about demand and supply for widgets in Econland. The first set of questions relates to tax, the second is about subsidy, and the third refers to price ceiling I. Suppose there is a tax of $4 per widget in Econland. (a) What is the equilibrium consumer price P D under the $4 tax? (b) What is the equilibrium quantity Q under the $4 tax? (c) Calculate the producer surplus under the $6 tax. (d) Calculate the change in consumer surplus from the $6 tax compared to the unregulated market. (e) Calculate the change in total surplus from the $6 tax compared to the unregulated market. II. Let’s think about the scenario where the government imposes a subsidy of $4 per widget in the unregulated market. (f) What is the equilibrium quantity Q under the $4 subsidy? III. Suppose instead of a subsidy, there is a price ceiling equal to $3. (g) Calculate the producer surplus. (h) With a price ceiling equal to $3, calculate the consumer surplus with perfectly efficient rationing. (i) With a price ceiling equal to $3, calculate the consumer surplus with perfectly inefficient rationing.
