ZOOM + i. Suppose that the market for bottled water is characterized by an upward-sloping supply curve and a downward iloping demand curve. In the abeence of the government intervention, the market clean at price P" and quantity Q'. Now the government imposes a binding price ceiling in the market for bottled water. " 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' bj Given this alternative characterization of the supply curve, identify the comumer surplus before and after the price ceiling Ell. ann economics student at another ivy-league university, argues that the change in comsumer surplus in part A it identical to the change in consumer surplus in part B. He cites two facts to support his anpumment. Fact 1) The demand curves, which represent consumers. willingness to pay for bottled water, are the same in part A as in part S. 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 Ell' If so, why? If not. why not? Be sure to say whether Eli get 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 70 50 .40 30 You set a fixed price for all customers. Calculate the marginal revenue of selling each additional cup of lemonade. What is your profil maximizing price? (In case of a tie, choose the lower price.) All the profil maximizing price, what are profil and consumer surplus" What price should you change to maximize total economic surplus? (In case of a tie, choose the lower price.) How could you use price discrimination to increase your profits? If you use perfect price discrimination, how does profit compare to total economic surplus