Page 551 - Krugmans Economics for AP Text Book_Neat

Module 50 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. Using the tables in Check Your Understanding Module 49, find excise tax of $0.40 per can of diet soda. Assume that there are
the equilibrium price and quantity in the market for no administrative costs from the tax.
cheese-stuffed jalapeno peppers. What is the total surplus in the Consumer
equilibrium in this market, and who receives it? Willingness Producer
to Pay Cost Section 9 Behind the Demand Curve: Consumer Choice
2. Consider the market for butter, shown in the accompanying
Ana $0.70 Zhang $0.10
figure. The government imposes an excise tax of $0.30 per
Bernice 0.60 Yves 0.20
pound of butter. What is the price paid by consumers post-tax?
Chizuko 0.50 Xavier 0.30
What is the price received by producers post-tax? What is the
Dagmar 0.40 Walter 0.40
quantity of butter sold? How is the incidence of the tax
Ella 0.30 Vern 0.50
allocated between consumers and producers? Show this on the
a. Without the excise tax, what is the equilibrium price and
figure.
the equilibrium quantity of soda?
Price b. The excise tax raises the price paid by consumers post-tax
of butter to $0.60 and lowers the price received by producers
(per pound)
$1.40 S post-tax to $0.20. With the excise tax, what is the quantity
1.30 of soda sold?
1.20 c. Without the excise tax, how much individual consumer
1.10 E
1.00 surplus does each of the consumers gain? How much
0.90 individual consumer surplus does each consumer gain with
0.80
0.70 the tax? How much total consumer surplus is lost as a result
0.60 of the tax?
D
d. Without the excise tax, how much individual producer
0 6 7 8 9 10 11 12 13 14 surplus does each of the producers gain? How much
Quantity of butter (millions of pounds) individual producer surplus does each producer gain with
the tax? How much total producer surplus is lost as a result
3. The accompanying table shows five consumers’ willingness to
of the tax?
pay for one can of diet soda each as well as five producers’ costs
e. How much government revenue does the excise tax create?
of selling one can of diet soda each. Each consumer buys at
f. What is the deadweight loss from the imposition of this
most one can of soda; each producer sells at most one can of
excise tax?
soda. The government asks your advice about the effects of an
Tackle the Test: Multiple-Choice Questions
1. At market equilibrium in a competitive market, which of the a. I only
following is necessarily true? b. II only
I. Consumer surplus is maximized. c. III only
II. Producer surplus is maximized. d. I, II, and III
III. Total surplus is maximized. e. None of the above
a. I only
3. Which of the following is true regarding equity and efficiency in
b. II only
competitive markets?
c. III only
a. Competitive markets ensure equity and efficiency.
d. I and II only
b. There is often a trade-off between equity and efficiency.
e. I, II, and III
c. Competitive markets lead to neither equity nor efficiency.
2. When a competitive market is in equilibrium, total surplus can d. There is generally agreement about the level of equity and
be increased by efficiency in a market.
I. reallocating consumption among consumers. e. None of the above.
II. reallocating sales among sellers.
III. changing the quantity traded.

module 50 Efficiency and Deadweight Loss 509