The 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)

PS6.2.2)Now suppose that the city has found a fail-safe way to tax parties by requiring each party host to pay a fee of $60. Find the new price for party-goers, the after tax price received by the party hosts, and the new equilibrium quantity.

LetPsbe the price the suppliers receive (after the tax),Pcbe the price the consumers pay for each party, andQtbe the after tax quantity.

Ps=?

Pc=?

Qt=?

E2)For the tax in PS6.2.2, calculate the following.

a)The deadweight loss of the tax:?

(Please enter a positive figure. Tax revenue is a transfer to the government, and is not part of DWL.)

b)The consumer surplus post-tax:?

c)Producer surplus post-tax:?

d)Tax revenue:?

E3) Show the welfare impact of this policy in a graph. In your graph, label regions corresponding to (total) producer surplus post-tax, (total) consumer surplus post-tax, tax revenue, and deadweight loss post-tax.

(Your graph is not graded, but you can check your answer. It is for your own understanding.)

What happens to total surplus?

a)Total surplus decreases

b)Total surplus stays the same

c)Total surplus increases

E4) What happens to Consumer surplus?

a)Consumer surplus stays the same

b)Consumer surplus increases

c)Consumer surplus decreases

E5) What happens to producer surplus?

a)Producer surplus drecreases

b)Producer surplus increases

c)Producer surplus stays the same

E6)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 stay the same

c)Total surplus would incrase

E7)Which policy would potential party-goers prefer?

(Consider the marginal willingness to pay of various potential party-goers. Assume the party-goers care only about the consumer surplus. Select each correct answer.)(More than one answer can be correct)

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

E8)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.)(More than one answer can be correct)

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

E9)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