Look at the two tables below, which show, respectively, the willingness to pay a
ID: 1225844 • Letter: L
Question
Look at the two tables below, which show, respectively, the willingness to pay and willingness to accept of buyers and sellers of bags of oranges. For the following questions, assume that the equilibrium price and quantity will depend on the indicated changes in supply and demand. Assume that the only market participants are those listed by name in the two tables. Given the equilibrium price of $10, what is the equilibrium quantity given the data above? Q* = bag(s). What if, instead of bags of oranges, the data in the two tables dealt with a public good like fireworks displays? If all the buyers free ride, what will be the quantity supplied by private sellers? Q* =. Assume that we are back to talking about bags of oranges (a private good), but that the government has decided that tossed orange peels impose a negative externality on the public that must be rectified by imposing a $5-per-bag tax on sellers. What is the new equilibrium price? P* = $. What is the new equilibrium quantity? Q* = bag(s). If the new equilibrium quantity is the optimal quantity, by how many bags were oranges being overproduced before? Q* = bag(s).Explanation / Answer
(a)
Actual equilibrium price is $10 per bag.
The maximum willingness to pay of Bob, Barb, Bill, Bart, and Brent is higher than or equal to $10 per bag. So, these five will be willing to purchase bag of ornages at the given equilibrium price.
The minimum acceptable price of carlos, courtney, chuck, cindy, and craig is lower or equal to $10 per bag. So, these five will be willing to sell that bag of oranges at the given equilibrium price.
As five buyers are willing to purchase and five sellers are willing to sell, a total of 5 bags will be exchanged at $10 per bag or at equilibrium price.
Quantity exchanged at equilibrium price is the equilibrium quantity.
So, the equilibrium quantity is 5 bags of oranges.
(b)
The lowest minimum acceptable price for a sell as per the given table is $2.
This means that society has to pay, at minimum, a $2 for getting at least one unit of firework display.
If all buyers free ride then this means that nobody will be willing to pay. In other words, society is willing to pay $0 for firework display.
As price being paid by society is less than the lowest minimum acceptable price of private sellers, no quantity of fireworks display will be supplied.
Thus, the quantity supplied by private sellers will be 0.
(c)
(i) Original equilibrium price = $10 per bag
Tax imposed = $5 per bag
New equilibrium price = Original equilibrium price + Tax imposed = $10 + $5 = $15
The new equilibrium price is $15 per bag.
(ii) The maximum willingness to pay of Bob and Barb is higher than or equal to $15 per bag. So, these two will be willing to purchase bag of ornages at the new equilibrium price.
The minimum acceptable price of carlos, courtney, chuck, cindy, and craig is lower or equal to $15 per bag. So, these five will be willing to sell that bag of oranges at the new equilibrium price.
It can be seen that at $15 per bag, 2 bags are denmanded and 5 bags are supplied. When quantity demanded and quantity supplied is not equal, lower of the two is the quantity exchanged.
So, at $15 per bag, 2 bags will be exchanged.
Quantity exchanged at equilibrium price is the equilibrium quantity.
Thus, the new equilibrium quantity is 2 bags.
(iii) Old equilibrium price = 5 bags
New equilibrium price = 2 bags
If new equilibrium quantity is optimal then,
Overproduction = Old equilibrium quantity - New equilibrium quantity = 5 bags - 2 bags = 3 bags
Thus, by 3 bags were oranges being overproduced before.
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