Question

The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment:

Quantity	Willingness to Pay
	(Dollars)
First bottle	5
Second bottle	4
Third bottle	3
Fourth bottle	2
Fifth bottle	1
Further bottles	0

The cost of producing a bottle of Zlurp is $1.50, and the competitive suppliers sell it at this price. (The supply curve is horizontal.)

Each Whovillian will consume_____bottles and receive a consumer surplus of_____

.

Producing Zlurp creates pollution. Each bottle has an external cost of $1.

Taking this additional cost into account, total surplus per person in the allocation you previously determined decreases to________

.

Cindy Lou Who, one of the residents of Whoville, decides on her own to reduce her consumption of Zlurp by 1 bottle.

Cindy's consumer surplus (ignoring the cost of pollution she experiences) is now______. Her decision______increases   total surplus in Whoville by_____

.

Mayor Grinch imposes a $1 tax on each bottle of Zlurp.

Consumption per person is now_____bottles. This yields a per-person consumer surplus of_____not including the cost of pollution, a per-person external cost of_____, and government revenue of_____m per person. Total surplus per person is now_____as a result of this policy. (Hint: Total surplus is equal to consumer surplus minus the external cost of pollution plus government revenue.)

Based on your calculations, you would or wouldn't   support the mayor's policy because it decreases or increased welfare compared to before the tax.

Answer 1