Question

You will take on the role of the benevolent social planner. Remember the sole objective of a benevolent social planner is to maximize total surplus. Below are two lists of numbers. The top list represents the opportunity costs of a number of firms that supply an unspecified commodity. The bottom list includes the willingness to pay of a number of buyers who desire to purchase this unspecified commodity. Using these lists answer the following questions.

Sellers and their Opportunity Costs:

Trampled by Turtles 7

Dispatch 8

Valerie June 7

Daft Punk 2

JoshRitter 3

Delfonics 5

Yola 2

Los Lobos 5

Che Apalache 4

Buyers and their Willingness to Pay:

Dolly 4

Loretta 8

Crystal 10

Ernest 5

Dwight 7

Rosanne 10

Ronnie 7

Clint 5

Tracy 9

1. How many exchanges should occur? (1 point)

2. What is the total surplus of each exchange that occurs? Give the seller’s letter, the buyer’s letter, and the total surplus of this pair’s exchange. (1 point)

3. What is total surplus for the entire market? (1 point)

4. Assume that a price ceiling is imposed upon this market. No unit will be permitted to trade for a price above $4.50.

         a. What is quantity supplied at this price? (1 point)

         b. What is quantity demanded at this price? (1 point)

         c. How many exchanges occur? (1 point)

5. Assume that the government has decided to impose a $3 tax per unit, to be paid by the sellers. A seller who does not sell a unit pays no tax. Therefore, the tax is like a cost increase of $3. A seller’s cost will really be $3 above the listed opportunity cost.

         a. How many exchanges will occur? (1 point)

         b. What is the total surplus of each exchange that occurs? Give the seller’s number, the buyer’s number, and the total surplus of this pair’s exchange. (1 point)

         c. What is total surplus for the entire market? (1 point)

         d. Is there any deadweight loss? If so, what is it? (1 point)

Answer 1