module 50 Efficiency and Deadweight Loss 509
Section 9 Behind the Demand Curve: Consumer Choice
Module 50 AP Review
Check Your Understanding
- Using the tables in Check Your Understanding Module 49, find
the equilibrium price and quantity in the market for
cheese-stuffed jalapeno peppers. What is the total surplus in the
equilibrium in this market, and who receives it? - Consider the market for butter, shown in the accompanying
figure. The government imposes an excise tax of $0.30 per
pound of butter. What is the price paid by consumers post-tax?
What is the price received by producers post-tax? What is the
quantity of butter sold? How is the incidence of the tax
allocated between consumers and producers? Show this on the
figure. - The accompanying table shows five consumers’ willingness to
pay for one can of diet soda each as well as five producers’ costs
of selling one can of diet soda each. Each consumer buys at
most one can of soda; each producer sells at most one can of
soda. The government asks your advice about the effects of an
0 678 9 10 11 1312 14
$1.40
1.30
1.20
1.10
1.00
0.90
0.80
0.70
0.60
Quantity of butter (millions of pounds)
Price
of butter
(per pound)
D
S
E
excise tax of $0.40 per can of diet soda. Assume that there are
no administrative costs from the tax.
Consumer
Willingness Producer
to Pay Cost
Ana $0.70 Zhang $0.10
Bernice 0.60 Yves 0.20
Chizuko 0.50 Xavier 0.30
Dagmar 0.40 Walter 0.40
Ella 0.30 Vern 0.50
a. Without the excise tax, what is the equilibrium price and
the equilibrium quantity of soda?
b. The excise tax raises the price paid by consumers post-tax
to $0.60 and lowers the price received by producers
post-tax to $0.20. With the excise tax, what is the quantity
of soda sold?
c. Without the excise tax, how much individual consumer
surplus does each of the consumers gain? How much
individual consumer surplus does each consumer gain with
the tax? How much total consumer surplus is lost as a result
of the tax?
d. Without the excise tax, how much individual producer
surplus does each of the producers gain? How much
individual producer surplus does each producer gain with
the tax? How much total producer surplus is lost as a result
of the tax?
e. How much government revenue does the excise tax create?
f. What is the deadweight loss from the imposition of this
excise tax?
Solutions appear at the back of the book.
Tackle the Test: Multiple-Choice Questions
- At market equilibrium in a competitive market, which of the
following is necessarily true?
I. Consumer surplus is maximized.
II. Producer surplus is maximized.
III. Total surplus is maximized.
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III - When a competitive market is in equilibrium, total surplus can
be increased by
I. reallocating consumption among consumers.
II. reallocating sales among sellers.
III. changing the quantity traded.
a. I only
b. II only
c. III only
d. I, II, and III
e. None of the above
- Which of the following is true regarding equity and efficiency in
competitive markets?
a. Competitive markets ensure equity and efficiency.
b. There is often a trade-off between equity and efficiency.
c. Competitive markets lead to neither equity nor efficiency.
d. There is generally agreement about the level of equity and
efficiency in a market.
e. None of the above.