of phone calls made. Provider B does not have a fixed service fee but instead charges $1 per minute for calls. Your friend‘s monthly demand for minutes of calling is given by the equation QD 5 150 2 50P, where P is the price of a minute.
a. With each provider, what is the cost to your friend of an extra minute on the phone? b. In light of your answer to (a), how many minutes would your friend talk on the phone with each provider?
c. How much would he end up paying each provider every month?
d. How much consumer surplus would he obtain with each provider? (Hint: Graph the demand curve and recall the formula for the area of a triangle.)
e. Which provider would you recommend that your friend choose? Why?
11. Consider how health insurance affects the quantity of healthcare services performed. Suppose that the typical medical procedure has a cost of $100, yet a person with health insurance pays only $20 out of pocket. Her insurance company pays the remaining $80. (The insurance company recoups the $80 through premiums, but the premium a person pays does not depend on how many procedures that person chooses to undertake.) a. Draw the demand curve in the market for medical care. (In your diagram, the horizontal axis should represent the number of medical procedures.) Show the quantity of procedures demanded if each procedure has a price of $100.
b. On your diagram, show the quantity of procedures demanded if consumers pay only $20 per procedure. If the cost of each procedure to society is truly $100, and if individuals have health insurance as just described, will the number of procedures performed maximize total surplus? Explain. c. Economists often blame the health insurance system for excessive use of medical care.
Given your analysis, why might the use of care be viewed as ―excessive‖?
d. What sort of policies might prevent this excessive use?
1. The market for pizza is characterized by a downward-sloping demand curve and an upward-sloping supply curve.
a. Draw the competitive market equilibrium. Label the price, quantity, consumer surplus, and producer surplus. Is there any deadweight loss? Explain.
b. Suppose that the government forces each pizzeria to pay a $1 tax on each pizza sold. Illustrate the effect of this tax on the pizza market, being sure to label the consumer surplus, producer surplus, government revenue, and deadweight loss. How does each area compare to the pre-tax case?
c. If the tax were removed, pizza eaters and sellers would be better off, but the government would lose tax revenue. Suppose that consumers and producers voluntarily transferred some of their gains to the government. Could all parties (including the government) be better off than they were with a tax? Explain using the labeled areas in your graph.
2. 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.‖
3. Consider the market for rubber bands. a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use the tools of consumer surplus and producer surplus in your answer.
b. If this market has very inelastic supply and very elastic demand, how would the burden of a tax on rubber bands be shared between
consumers and producers? Contrast your answer with your answer to part (a).
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 is taxing food a ―good‖ way to raise revenue? In what sense is it not a ―good‖ way to raise revenue?
6. Daniel Patrick Moynihan, the late senator from New York, once introduced a bill that would levy a 10,000 percent tax on certain hollowtipped bullets.
a. Do you expect that this tax would raise much revenue? Why or why not?
b. Even if the tax would raise no revenue, why might Senator Moynihan have proposed it?
7. The government places a tax on the purchase of socks.
a. Illustrate the effect of this tax on equilibrium price and quantity in the sock 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.
8. Suppose the government currently raises $100 million through a 1-cent tax on widgets, and
another $100 million through a 10-cent tax on gadgets. If the government doubled the tax rate on widgets and eliminated the tax on gadgets, would it raise more tax revenue than it does today, less tax revenue, or the same amount? Explain.
9. This chapter analyzed the welfare effects of a tax on a good. Consider now the opposite policy. Suppose that the government subsidizes a good: For each unit of the good sold, the government pays $2 to the buyer. How does the subsidy affect consumer surplus, producer surplus, tax revenue, and total surplus? Does a subsidy lead to a deadweight loss? Explain.
10. Hotel rooms in Smalltown go for $100, and 1,000 rooms are rented on a typical day. a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room. After the tax is imposed, the going rate for hotel rooms rises to $108, and the number of rooms rented falls to 900. Calculate the amount of revenue this tax raises for Smalltown and the deadweight loss of the tax. (Hint: The area of a triangle is 1?2 3 base 3 height.)
b. The mayor now doubles the tax to $20. The price rises to $116, and the number of rooms rented falls to 800. Calculate tax revenue and deadweight loss with this larger tax. Do they double, more than double, or less than double? Explain.
11. Suppose that a market is described by the following supply and demand equations:
QS 5 2P QD 5 300 – P
a. Solve for the equilibrium price and the equilibrium quantity.
b. Suppose that a tax of T is placed on buyers, so the new demand equation is
QD 5 300 – (P 1 T).
Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?
c. Tax revenue is T 3 Q. Use your answer to