AP_Krugman_Textbook

module 50 Efficiency and Deadweight Loss 509

Section 9 Behind the Demand Curve: Consumer Choice

Module 50 AP Review

Check Your Understanding

1. 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?


2. 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.


3. 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

1. 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


2. 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

3. 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.