he City of Cambridge is concerned about the number of wild MIT students who will be partying on Halloween and wants to limit the number of parties in order to curb the costs of policing underage drinking and noise violations. The city has asked you to evaluate the welfare implications of policies they are considering. Think of price here as the amount of money party hosts will collect at the door from party-goers. The demand for parties is given byQ=3002p. The supply of parties is given byQ=p.

E1)How would the welfare impact differ if the licenses were allocated randomly among all potential party hosts rather than giving the licenses to those willing to supply at the lowest prices? (Assume that licenses cannot be resold.)

a)Total surplus would decrease

b)Total surplus would stays the same

c)Total surplus would increase

E2) Which policy would potential party-goers prefer?

a)Some potential party-goers would prefer the tax policy

b)Some potential party-goers would prefer the license policy

c)Some potential party-goers would be indifferent between the tax and license policies

E3)Which policy would potential hosts prefer?

(Consider the marginal willingness to supply of various potential hosts. Assume the 50 licenses are allocated to the hosts with lowest MWTS. Assume the hosts care only about producer surplus. Select each correct answer.)

a)Some potential hosts would prefer the tax policy

b)Some potential hosts would prefer the license policy

c)Some potential hosts would be indifferent between the tax and license policies

E4)Which policy does the city government prefer?

(Assume that the city will spend $20 on average policing each party and that the city only cares about tax revenue less policing costs not producer surplus, consumer surplus, or deadweight loss.)

a)The city would prefer the tax policy

b)The city would prefer the license policy

c)The city would be indifferent between the tax and license policies

d)The city would prefer neither policy to either policy

E5)The following table gives the willingness to pay for cars for eight individuals. There is a constant marginal cost of 30 to produce a car. Assume there are no fixed costs and that each individual chooses to either buy one car or zero.

Person Willingness to Pay

A 50

B 45

C 42

D 32

E 20

F 17

G 10

H 3

Calculate consumer and producer surplus under perfect competition.

Consumer surplus =?

Producer surplus=?

E6)Calculate the price, consumer and producer surplus under a monopolist who is unable to price discriminate.

p=?

CS=?

PS=?

E7)Calculate consumer and producer surplus under a perfectly price discriminating monopoly.

CS=?

PS=?

E8)Consider the welfare implications of the different price structures from PS6.3.1-PS6.3.3.

Which outcomes are perfectly efficient?

a)Perfect competition

b)Non-price-discriminating monopoly

c)Price-discriminating monopoly