1a. (7 points) Suppose the market in Bagley for apples is characterized by a demand curve where Q = 500 -100P and supply is given by Q = 100P-100. Graph this market, labeling everything possible and being sure to indicate the equilibrium price and quantity, as well as consumer and producer surplus. Assuming Bagley has a competitive market for apples, how big are CS, PS, and TS? 1b. (6 points) Suppose that the Bagley City Council believes an apple a day really does keep the doctor away, and accordingly wishes to give each citizen that wants one an apple per day for free. There are 500 apple eaters in Bagley. How many apples can they expect to give away each day? What will the new price be that the government pays apple sellers for this quantity? Therefore, what will the daily expense be for the city on apples? Does this cost reflect the complete opportunity cost of giving away apples? (Hint: there are at least 2 ways it does not). Calculate the change in producer and consumer surplus. What is the change in Consumer Surplus? Producer Surplus? If we ignore for now the distortionary impacts due to raising taxes in some other market, how large is the net impact of this policy in terms of total surplus? Why would it be wrong to actually ignore rising taxes? 1c. (7 points) Let's say the policy will be funded through a $3 tax on sales of 12-packs of beer. The competitive market for 12-packs of beer is given by a demand curve: Q= 2300-100P and a supply curve of Q= 200P-1000. What is the pre-tax equilibrium? What are CS, PS and TS in the market for beer? Now let sellers pay a $3 Tax for each 12-pack sold. That is, the cost of supplying a unit of beer rises by $3 for each Q, since the tax is a new cost of doing business. What is the new Q of beer purchased with the tax? What is the new price you see in the store? How much of that price is kept by the seller? How much government revenue (GR) is raised? Is it enough to pay for the apple a day program? Graphically, show the new CS, PS, GR, and deadweight loss (DWL). How large in dollars is the DWL? Is that a cost or benefit of the program? Therefore, what are the net benefits of the tax? What are the total net benefits to society of this program? Would you recommend it be undertaken-why or why not?