EC1000 Question Sheet 1 Week 4

1. It is a hot day, and Bert is thirsty. Here is the value he places on a bottle of water:
Marginal willingness to pay for first bottle
Marginal willingness to pay for second bottle
Marginal willingness to pay for third bottle
Marginal willingness to pay for fourth bottle

7
5
3
1

a. From this information, calculate Berts total willingness to pay for one, two, three and
four bottles.
b. Derive Bert's demand schedule. Graph his demand curve for bottled water.
c. If the price of a bottle of water is 4, how many bottles does Bert buy? How much
consumer surplus does Bert get from his purchases? Show Bert's consumer surplus in your
graph.
d. If the price falls to 2, how does quantity demanded change? How does Bert's consumer
surplus change? Show these changes in your graph.
2. Many parts of California experienced a severe drought in the late 2000s and early 2010s.
a. Use a diagram of the water market to show the effects of the drought on the
equilibrium price and quantity of water.
b. Many communities did not allow the price of water to change, however. What is
the effect of this policy on the water market? Show on your diagram any surplus
or shortage that arises.
c. A 2001 op-ed piece in The Wall Street Journal stated that all Los Angeles
residents are required to cut their water usage by 10 percent as of March 1 and
another 5 percent starting May 1, based on their 1996 consumption levels. The
author criticized this policy on both efficiency and equity grounds, saying not
only does such a policy reward families who 'wasted' more water back in 1996, it
does little to encourage consumers who could make more drastic reductions, [and]
... punishes consumers who cannot so readily reduce their water use. In what way
is the Los Angeles system for allocating water inefficient? In what way does the
system seem unfair?
d. Suppose instead that Los Angeles allowed the price of water to increase until the
quantity demanded equalled the quantity supplied. Would the resulting allocation
of water be more efficient? In your view, would be more or less fair than the
proportionate reductions in water use mentioned in the newspaper article? What
could be done to make the market solution fairer?
3. Evaluate the following two statements. Do you agree? Why or why not?
a. A tax that has no deadweight loss cannot raise any revenue for the government.
b. A tax that raises no revenue for the government cannot have any deadweight loss.

EC1000 Question Sheet 1 Week 4

4. Suppose that the government imposes a tax on heating oil.

a. Would the deadweight loss from this tax likely be greater in the first year after it is
imposed or in the fifth year? Explain
b. Would the revenue collected from this tax likely be greater in the first year after it
is imposed or in the fifth year? Explain.
5. After economics class one day, your friend suggests that taxing food would be a good way
to raise revenue because the demand for food is quite inelastic. In what sense taxing food is a
"good" way to raise revenue? In what sense it is not a "good" way to raise revenue?
6. The government places a tax on the purchase of socks.
a. Illustrate the effect of this tax on equilibrium price and quantity in the socks
market.
Identify the following areas both before and after the imposition of the tax: total
spending by consumers, total revenue for producers, and government tax revenue.
b. Does the price received by producers rise or fall? Can you tell whether total
receipts for producers rise or fall? Explain.
c. Does the price paid by consumers rise or fall? Can you tell whether total spending
by consumers rises or falls? Explain carefully. (Hint: Think about elasticity.) If total
consumer spending falls, does consumer surplus rise? Explain.
7. Two drivers - Tom and Jerry - drive up to a gas station. Before looking at the price, each
places an order. Tom says, Id like 10 litres of gasoline. Jerry says, Id like 10
of gasoline. What is each drivers price elasticity of demand?
8. Explain why the following might be true: A drought around the world raises the total
revenue that farmers receive from the sale of grain, but a drought only in Ukraine reduces the
total revenue that Ukrainian farmers receive.
9. During the 1990s, technological advances reduced the price of computers. How do you
think this affected the demand for computer software? For typewriters?
10. Explain whether each of the following government activities is motivated by a concern
about equity or a concern about efficiency. In the case of efficiency, discuss the type of
market failure involved.
a. regulating telephone call charges.
b. providing some poor people with vouchers that can be used to buy food.
c. prohibiting smoking in public places.
d. breaking up Microsoft into two smaller companies.
e. imposing higher personal income tax rates on people with higher incomes.