The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty r

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1 month ago

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The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty r

efreshment:
Quantity Willingness to Pay (Dollars)
First bottle 5
Second bottle 4
Third bottle 3
Fourth bottle 2
Fifth bottle 1
Further bottles 0
The cost of producing a bottle of Zlurp is $1.50, and the competitive suppliers sell it at this price. (The supply curve is horizontal.)
Each Whovillian will consume _____ 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 Decreases) welfare compared to before the tax.

Business

1 answer:

Katen [2.9K] · Answer 1 · 2026-03-05T10:47:25+03:00

Answer and Explanation:

The calculations are detailed below:

1) The value of 4 is selected because the marginal cost exceeds the marginal benefit; if the quantity were increased, the cost of the drink would surpass what consumers are willing to pay.

2) The consumer surplus can be calculated as

= (5 - 1.5) + (4 - 1.5) + (3 - 1.5) + (2 - 1.5)

= 8

3) The total surplus drops to

Since we know that

= Consumer surplus - external cost

= 8 - 4

= 4

4) Therefore, Cindy's consumer surplus becomes

= (5 - 1.5) + (4 - 1.5) + (3 - 1.5)

= 7.5

5) It increases

6) 8 - 7.5 results in 0.5

7) Her consumption totals 3 bottles

8) Consumer surplus now stands at

= (5 - 2.5) + (4 - 2.5) + (3 - 2.5)

= 4.5

9) External cost amounts to 3 × 1 = 3 bottles

10) Revenue for the government is = 3 × 1 = 3 bottles

11) The total surplus computes to

We know that

= Consumer surplus - pollution external cost + government revenue

= 4.5 - 3 + 3

= 4.5

12) thus

13) increases