1. Suppose that the market for bottled water is characterized by an upward-sloping supply curve and a downward sloping demand curve. In the absence of the government intervention, the market clears at price P* and quantity *. Now the government imposes a binding price ceiling in the market for bottled water. a) Show the welfare effects of the binding price ceiling. Specifically, identify consumer surplus, producer surplus, and social surplus before and after the price ceiling is implemented. Now suppose that instead of an upward-sloping supply curve, the supply curve for bottled water is more accurately characterized by a perfectly inelastic supply curve at the quantity Q*. b) Given this alternative characterization of the supply curve, identify the consumer surplus before and after the price ceiling. Robbie, an economics student at another ivy-league university, argues that the change in consumer surplus in part A is identical to the change in consumer surplus in part B. He cites two facts to support his argument. Fact 1) The demand curves, which represent consumers. willingness to pay for bottled water, are the same in part A as in part B Fact 2) The price the consumer pays after the price ceiling is the same in part A as in part B. c) Do you agree with Eli? If so, why? If not, why not? Be sure to say whether Eli got his facts wrong. Also, mention any facts critical to your argument that Eli left out. 2. You decide to open a lemonade stand outside your dorm on a hot summer day. You know the distribution of reservation prices for the people who will walk by your stand each day (given in the table below). Each cup of lemonade costs you 30 cents to produce and you have no fixed costs. Person Reservation Price 1. 10 1.00 90 80 70 --IQTMOOD1 60 50 40 30 20 Calculate the marginal revenue of selling each additional cup of lemonade What is your profit maximizing price? At the profit maximizing price, what are profit and consumer surplus? What price should you charge to maximize total economic surplus? How could you use price discrimination to increase your profits? If you use perfect price discrimination how does profit compare to total economic surplus