ECO 108 Lecture Notes - Lecture 15: Deadweight Loss, Economic Surplus, Demand Curve

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peachwoodchuck721

3 Aug 2018

School

University of Rochester

Department

Economics

Course

ECO 108

Professor

landsburg

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Document Summary

T(cid:921)(cid:914)(cid:933)"(cid:932) area a + b + d + e. with the subsidy in place, producers receive the new price and sell the new quantity. So the producers are getting b + c + d + g. taxpayers pay the subsidy. The total subsidy is the subsidy per widget times the new equilibrium quantity of widgets, which is the area of the rectangle b + c + d (cid:860) (cid:886) (cid:860) (cid:887). I(cid:933)"(cid:932) (cid:916)(cid:928)(cid:934)(cid:927)(cid:933)(cid:918)(cid:917) (cid:914)(cid:932) (cid:927)(cid:918)(cid:920)(cid:914)(cid:933)(cid:922)(cid:935)(cid:918) (cid:915)(cid:918)(cid:916)(cid:914)(cid:934)(cid:932)(cid:918) (cid:933)(cid:921)(cid:918) (cid:933)(cid:914)(cid:937)(cid:929)(cid:914)(cid:938)(cid:918)(cid:931)(cid:932) (cid:921)(cid:914)(cid:935)(cid:918) (cid:933)(cid:928) pay it (rather than receive it). Summing the columns, we see that without the subsidy, social gain was a + b + d + g. with the (cid:932)(cid:934)(cid:915)(cid:932)(cid:922)(cid:917)(cid:938)(cid:861) (cid:936)(cid:918)"(cid:931)(cid:918) (cid:925)(cid:918)(cid:919)(cid:933) (cid:936)(cid:922)(cid:933)(cid:921) (cid:882) (cid:860) (cid:883) (cid:860) (cid:885) (cid:860) (cid:888) (cid:887). T(cid:921)(cid:918) (cid:932)(cid:934)(cid:915)(cid:932)(cid:922)(cid:917)(cid:938) (cid:931)(cid:918)(cid:917)(cid:934)(cid:916)(cid:918)(cid:932) social gain by f. that amount is what we call the deadweight loss. With the subsidy in place, consumers care not about the new price, but about the new price minus the subsidy.

Related Questions

Under a binding price ceiling, what does the change in consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the product at the lower price.
B) The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.

When the market price is held above the competitive level, the deadweight loss is composed of:

A) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

B) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
C) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.

Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole
A) worse off than a comparable tariff.
B) not as bad off as a comparable tariff.

C) about the same as a comparable tariff.

D) Any of the above can be true.

What is the welfare impact of a subsidy policy?
A) Producer surplus increases, consumer surplus declines, and total welfare declines.
B) Producer and consumer surplus increase, and these gains are larger than the government cost.

C) Producer and consumer surplus increase, and these gains are smaller than the government cost.

D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program.

Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.

violetmole943

The market for packets of cigarettes has been described by the following supply and demand functions:

Supply: P = 10 + 4Q Demand: P = 100 - 5Q where P is the price in dollars and Q is the quantity of packets of cigarettes per month (in thousands).

Part A) Construct a graph of supply and demand for this market showing all intercepts. What are the equilibrium prices and quantities? Show these on your graph.

Part B) At the market equilibrium price, what would be the total monthly revenue?

Part C) Calculate consumer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part D) Calculate producer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part E) Assume that a per-unit tax of $9.00 per packet of cigarettes is imposed by the government on the suppliers of cigarettes. Depict this on your demand and supply diagram. (Hint: the new tax inclusive supply function will be: P = 19 + 4Q). What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive?

Part F) How much is the government revenue from the tax on suppliers?

Part G) Calculate consumer surplus and producer surplus after the imposition of the tax and any deadweight loss associated with the tax. Indicate these surplus and tax revenue areas on your diagram. Explain what the deadweight loss represents.

Part H) Now assume that instead of imposing a per-unit tax of $9.00 per pack on the suppliers of cigarettes the government decides to apply the same per-unit tax of $9.00 on consumers. Depict this on your demand and supply diagram. (Hint: the new tax inclusive demand function will be: P = 91 - 5Q) What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive? (5 marks)

Part I) How much is the government revenue from the tax on consumers? (1 mark)

Part J) Who bears the greatest burden of the tax in each case, producers or consumers? Does your answer depend on whether the tax is levied on producers or consumers?

I am really having difficulty understanding Part J - can that please be answered with some detail?

carminewildebeest911

Suppose that the U.S. Department of Agriculture (USDA) administers the price floor for cheese, set at $0.17 per pound of cheese. (In real life the actual price floor was officially set at $16.10 per hundredweight of cheese. One hundredweight is 100 pounds.) At that price, according to data from the USDA, the quantity of cheese produced in 2009 by U.S. producers was 212.5 billion pounds, and the quantity demanded was 211 billion pounds. To support the price of cheese on the price floor, the USDA had to buy up to 1.5 billion pounds of cheese. The accompanying diagram shows the supply and demand curves illustrating the market for cheese.

A. In the absence of a price floor, the maximum price that a few of the consumers are willing to pay is $0.20 for a pound of cheese whereas the market equilibrium price is $0.13 per pound. The graph also shows that the minimum price at which a few of the producers are willing to sell is $0.06 per pound. In the absence of a price floor, how much consumer surplus is created?

b. How much producer surplus?

c. What is the total surplus?

D. The maximum price that a few of the consumers are willing to pay is $0.20 per pound of cheese, and the price floor is set at $0.17 per pound. With the price floor at $0.17 per pound of cheese, consumers buy 211 billion pounds of cheese. How much consumer surplus is created now?

E. The minimum price at which a few of the producers are willing to sell a pound of cheese is $0.06, and the price floor is set at $0.17 per pound. With the price floor at $0.17 per pound of cheese, producers sell 212.5 billion pounds of cheese (some to consumers and some to the USDA). How much producer surplus is created now?

F. The surplus cheese USDA buys is the difference between the number of cheese producers sell (212.5 billions pounds of cheese) and the number of cheese consumers is willing to buy at the price floor (211 billions pounds of cheese). How much money does the USDA spend on buying up surplus cheese?

G. Taxes must be collected to pay for the purchases of surplus cheese by the USDA. As a result, the total surplus (producer plus consumer) is reduced by the amount the USDA spent on buying surplus cheese. Using your answers for parts d, e, and f, what is the total surplus when there is a price floor?

H. How does this compare to the total surplus without a price floor from part c?

amaranthimpala915

ECO 108 Lecture Notes - Lecture 15: Deadweight Loss, Economic Surplus, Demand Curve

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