Part I: Short answer and T/F/U. (24 pts) For True, False or Uncertain (T/F/U) say whether the statement is T/F/U and provide a short explanation (not more than 10 lines) why. Some of these T/F/U questions are hard - they are intended to make you think. If you specify that a statement is Uncertain please explain what assumptions would make it true or false.

1)T/F/U(4 pts): If Jack Daniels whiskey sells for $10 a bottle and if 1,000 bottles were sold last year, then the total value of those bottles to consumers was $10,000. Use a picture to help answer (and it would be good to mention the concept of consumer surplus).

2)T/F/U(4 points): Consumers by 1,000 heads of lettuce per week, and if the price of lettuce falls by 10 per head, then the consumer's surplus will increase by $100. (And a picture please.)

In the following problems (related to taxes) we have to be careful about what we mean by "prices":

Buyer's Price (P_b) - price paid by buyers

Seller's Price (P_s) - price received by sellers

Market Price (P_M) - this is where things get difficult.

oExcise tax(tax on sellers) P_M=P_band P_s=P_M-tax - the supplier advertises the market price, the buyer pays the market price, and the seller gets the market price minus tax. (This is what we mean by "the supply curve shifts for an excise tax")

oSales tax(tax on buyers) P_M=P_sand P_b=P_M+tax - the supplier advertises the market price, the seller receives the market price, but the buyer has to pay the market price plus tax. (This is what we mean by "the demand curve shifts for a sales tax")

3)T/F/U(10 pts) If the government imposes taxes on coffee - both a 50-per-cup excise tax (tax on suppliers) and a 50-per-cup sales tax (tax on buyers) - then the market price for coffee will not change. Explain with a diagram.

4)Short Answer(6 pts): Suppose an excise tax (tax on sellers) of 10 per apple would cause the market price (buyer's price) of apples to rise from 20 each to 23 each. What would be the effect of a sales tax of 10 per apple?

Part II: Longer Problems.(58 points)Show your calculations, draw clear diagrams, and briefly explain.

5)(10 pts) Imagine that you are a benevolent policymaker. You have a choice of four allocations to choose from, each which provides three people (Jena, Ruochen, and Sabarish) with some level of welfare:

Person

Welfare

Jena

$20

Ruochen

$0

Sabarish

$0

A)

Person

Welfare

Jena

$3

Ruochen

$4

Sabarish

$5

B)

Person

Welfare

Jena

$3

Ruochen

$3

Sabarish

$3

C)

D)

Person

Welfare

Jena

$2

Ruochen

$9

Sabarish

$8

For all of the following questions, please explain your answer.

a)Which of these allocations are Pareto optimal? (there may be more than one).

b)Which of these allocations maximize a utilitarian social welfare function? (there may be more than one).

c)Which of these allocations maximize a Rawlsian social welfare function? (there may be more than one).

6)This is a sequence of problems on taxation and deadweight loss. Suppose the demand curve for oranges is given by the equation: (38 POINTS: a=6, b=4, c=4, d=10, e=4, f=10)

Q_d= -200*P + 1,500

With quantity (Q) measure in oranges per day and price (P) measured in dollars per orange. The supply curve is given by

Q_s= 800*P

a)Compute the equilibrium price and quantity of oranges. Draw a picture of supply and demand, with the quantity and price labeled.

Equilibrium Price (market price that buyers pay):____

Price that suppliers receive____

Quantity____

Suppose that an excise tax of 50 apiece is imposed on oranges (this means that suppliers "pay" a tax to the government of 50 for each orange sold so that the price suppliers receive is 50 less than what buyers pay).

b)What are the equations for the new supply and demand curves?

c)What is the new equilibrium price and quantity of oranges? What is the new post-tax price from the supplier's point of view? Fill in the equilibrium price, etc. in the blanks below, and also label the diagram that you find below (the left part of the diagram) of the supply and demand curves. (We want numbers.)

Equilibrium Price (market price that buyers pay):____

Price that suppliers receive____

Quantity____

d)What is the tax incidence? Calculate how much of the tax is paid by consumers versus suppliers. Specifically, what is the difference in price paid by buyer after the tax versus before the tax? What about suppliers - price received by supplier before and after?

Tax Incidence for Consumers (new price - old price):____

Tax Incidence for Suppliers (old price - new price)____

e)What is the surplus? (Sum of consumers' surplus plus producers' surplus). What is the deadweight loss? Answer this part using the drawing below, putting the labels from the diagram into the table below:

Before Tax

After Tax

Consumers' Surplus

Producers' Surplus

Tax Revenue

Social Gain

Social Loss (Deadweight Loss)

f)Now calculate the numerical values and put in the table below

Before Tax

After Tax

Consumers' Surplus

Producers' Surplus

Tax Revenue

Social Gain

Social Loss (Deadweight Loss)

7)Now we will repeat part of the above question for a 50 tax on sales (a 50 tax that is paid by and collected from buyers) instead of a 50 excise tax (tax that is paid by and collected from sellers). (Don't re-do the deadweight loss from part e or f.) (10 POINTS, a=6, b=4)

a)Compute the equilibrium price and quantity of oranges for a 50 tax on sales of oranges.

Price that buyers pay:____

Equilibrium Market Price that suppliers receive____

Quantity____

b)Calculate the tax incidence. How much of the tax is paid by consumers versus suppliers? Specifically, what is the difference in price paid by buyer after the tax versus before the tax? What about suppliers - price received by supplier before and after? Is this the same or different than above?

Tax Incidence for Consumers (new price - old price):____

Tax Incidence for Suppliers (old price - new price)____