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Ben C. Yu Intro to Microecon 2/22/12 Homework 4 1.

In a perfect competition market structure, long-run profits are zero and barriers to entry are slight or inexistent. A ________ also shares these characteristics. Additionally, this type of market has price makers, and social surplus is not maximized, but society might benefit from product diversity. a. Oligopoly b. Monopoly c. Command Economy d. Monopolistic Competition e. Free Market 2. In the scenario posed by the question, David and Keith are treating the toothbrush as a common good: consumption is rivalrous, but non-excludable. Here, rivalrous implies that each individual bears a progressively larger externality as usage continues, such that eventually, one individual must give consumption up. Given that the negative externality imposed on each individual is caused by the other individual using the toothbrush, ways to remove the externality inherently require for only ONE person to use the toothbrush. The most obvious solution is privatization: one person in question must have bought the toothbrush to begin with, and said individual has the property rights over it. This would solve the problem immediately. However, following the Coase Theorem, notwithstanding who has the property right, private bargaining can occur between the two individuals rather than relying on an externality to be too large for one person to bear, David can pay Keith for rights to use it, or vice versa. Finally, a Pigouvian tax is also a possible solution. A third party can tax the toothbrush for each usage, and raise the tax each day that both David and Keith are both willing to use the toothbrush. This process repeats until one individual is no longer willing to pay the tax, and only one person is willing to pay to use the toothbrush. This would eliminate the externality and 3.

Given that anyone can store small amounts of gasoline then resell it. A 10% sales tax on a luxury is progressive. 25$ tax on all anesthesia users. It is not increase as the taxable base increases. Also. in that it would ideally discourage some individuals from spending money on luxury items. the hoarders will no longer store such large amounts of gasoline because they know that the government will impose future price ceilings as well. C. This is because luxury goods will vary in price. hoarders will sell at the price ceiling to maximize profit. Similarly. meaning that the tax varies as the taxable base (here. In the short run. First off. B. traffic there was lowered by 15% (it is the OVERALL traffic in London that is lowered by 12%). etc. A tax of $200 on everyone is regressive. Their situation results in a natural monopoly because only those who have invested in a huge storage tank can actually store gasoline. 7. it does not distort behavior. notwithstanding this tax. most progressive taxes exempt necessities. which this tax obviously does not do. Second. 6. 9. who will be able to capitalize on my efforts without making much of a contribution of their own. This is a progressive tax. The question specifically asks about the traffic at the center of the city. 5. However. since only one person (or relatively few people) will be able to dance or talk to the attractive people at a time. National defense is a public good. so there is no variance between goods. c. this 10% doesn t distort behavior in that if an individual needs anesthesia. since only those who have paid can get in. d. which is income in this situation. In the long run. this overwhelming cost advantage creates barriers to entry for competitors. there are no barriers to entry in this market.) Also. 10. E. since a $200 tax can t be avoided by not doing anything (and isn t exactly taxing anything). anesthesia has a relatively uniform price. since none of them can individually impact the price of resold gasoline. b. A. This is because while the attractive individuals are non-excludable everyone in the club can talk to whoever they want it is rivalrous. A. the price of the good) increases. meaning a 10% tax on anesthesia would be rather lump sum (similar to a. 8. The fellow group member who doesn t do much is a free-rider. the original suppliers have wonderful economies of scale. A. say. it is not rivalrous because those who have paid cannot effect the consumption of others in the room. they ll get it if they need it. all of the sellers will be price takers. D. Finally. This is a regressive tax. it would distort behavior. Movies in a movie theatre are excludable. It is both non-rival and non-excludable. as discussed throughout the chapter. Additionally. It increases as the taxable base increases. Given that each extra additional unit of gasoline is constant. everyone is selling an identical item (reselling gasoline). B. . a. which stifles the profitability of hoarding.4. The number of attractive members of the opposite gender in a club is a common good.

The other is that it reducers the quantity of the good. producers do lose out because they cannot charge as much as they want. since demand will outstrip supply. one being that it forces some producers to drop out of the market. these producers can sell all of the good. As a whole. and consumer surplus goes up. For the consumers as a whole. the caveats for individual producers and consumers will be relatively small the market mostly clears. for those who have remained in the market. But this also means that the quantity demanded goes up (given the cheaper price).11. Given that this is a barely-binding price ceiling. c. a. This does two things. they don t necessarily lose out. The DWL here is very marginal. d. since their demand will not be met the producers have a limited supply. which is the equilibrium price. . Some individual consumers lose out. For individual producers. this is good because the item is now much cheaper. b. The producer surplus therefore goes down.

Individual producers. Early research showed higher elasticities between 1. and will have a significant DWL. This allows us to conclude two things: first. This factor contributes greatly to the DWL. which would mean that tax revenues would cause minimal impact on the social surplus. The quantity will drop sharply and many producers will drop out of the market. A tax increase would not increase the DWL by much. because it is unclear what the precise range of the elasticity is. Many individual consumers. the impact is still greater than one with 6.5. Consumer surplus goes up drastically. 12.2% 13. don t necessarily lose out. if labor supply is inelastic.2%/6.3-1. My favorite statistic was that only 43 state governments (and many local governments) collect individual income taxes. and consumers as a whole gain. 14. once again. and second. As a very-binding price ceiling. I had previously believed that all 50 states collected individual income taxes! . This market will not clear. there will be a large loss of producer surplus. lose because their demand cannot be met: the supply quantity is far less than quantity demanded. even if the tax is spread 12%/0. however.e. the market will suffer a shortage. which in turn makes it unclear whether optimal taxation is comparatively higher or lower than the current 40% rate. then then the number of hours someone works is highly dependent on the wage at which they are paid. However. If the labor supply is elastic. that because tax incidence is spread evenly between producer and consumer. then an increase in tax will not have too much of an effect on the hours worked. that taxes don t impact the price. Economists are conflicted about the labor supply elasticity debate. only because those who remain in the market will sell all of their supply. and comparably high taxes would create a larger DWL.4%. For producers as a whole.