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	10
Second bottle	8
Third bottle	6
Fourth bottle	4
Fifth bottle	2
Further bottles	0

The cost of producing a bottle of Zlurp is $3.50, and the competitive suppliers sell it at this price. (The supply curve is horizontal.)

Each Whovillian will consume (HOW MANY) 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 OR DECREASES 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 $? 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 WOULD NOT support the mayor's policy because it INCREASES OR DEACREASES welfare compared to before the tax.

Answer 1

Each whovillian will consume four bottles because they are willing to pay atleast $3.50 for 1st bottle to 4th bottle.

Consumer Surplus per person = willingness to pay - price paid (3.50)
10 - 3.5 = 6.5
8 - 3.5 = 4.5
6- 3.5 = 2.5
4- 3.5 = 0.5
2 - 3.5 = -1.5 (won't buy)

0-3.5 = -3.5 (won't buy)

Total consumer surplus = 6.5+4.5+2.5+0.5= $14

When each inhabitant has an external cost of $1, then total surplus per person = consumer surplus per person - external cost per person = $14- ($1*4) = $10 per person.

Total surplus per person decreases by $4.

If Cindy consumes one bottle less, then this means she will consume 3 bottles now. Her consumer surplus will be 6.5+4.5+2.5 = $13.5

Her decision increases total surplus in Whoville : $1-$14-$13.5=$0.50.

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

Consumption per person is now  3 bottles because they are willing to pay atleast $4.50 for 1st bottle to 3rd bottle.

Consumer Surplus per person = willingness to pay - price paid (4.50)
10 - 4.5 = 5.5
8 - 4.5 = 3.5
6- 4.5 = 1.5
4- 4.5 =- 0.5

Total consumer surplus per person = 5.5+3.5+1.5=$10.5

External cost per person = $3.

Government revenue per person= $3

Total surplus = 10.5-3+3 = $10.5

Yes I would support the mayor's policy because it increases welfare compared to before the tax.