This is from the 6th edition, chapter 10. Willingness to pay: first bottle-$5 se

Question

This is from the 6th edition, chapter 10.

Willingness to pay:

first bottle-$5

second bottle-$4

third bottle-$3

fourth bottle-$2

fifth bottle-$1



part A asks how many each person will consume and for consumer surplus if the cost of each bottle is 1.50. The answer is four bottles with a consumer surplus of $8.

part B says "producing Zlurp creates pollution. Each bottle has an external cost of $1. Taking this additional cost into account, what is the total surplus per person in the allocation you described in part A?"



do i add the 1$ tax to the price and determine the new quantity consumed and then the new surplus, or do i just subtract $1*4 bottles from the current surplus?

Explanation / Answer

This is from the 6th edition, chapter 10.
Willingness to pay:
first bottle-$5
second bottle-$4
third bottle-$3
fourth bottle-$2
fifth bottle-$1

part A asks how many each person will consume and for consumer surplus if the cost of each bottle is 1.50. The answer is four bottles with a consumer surplus of $8.

This is because the cost is between the fourth and fifth bottle ($1.50 is between $1 and $2), so the lower is taken. Four bottles are purchased, meaning that the fifth bottle is NOT purchased.

However, we're buying at $1.50 per bottle for four bottles, which adds up to $1.50 x 4 = $6.00

but, we were willing to pay:

$5 + $4 + $3 + $2 + $1 = $14

$14 - $6 = $8 consumer surplus

part B says "producing Zlurp creates pollution. Each bottle has an external cost of $1. Taking this additional cost into account, what is the total surplus per person in the allocation you described in part A?"

Now the surplus is $8 - ($1 x 5 bottles) = $3 is the new surplus (the bolded part of your question, below, is correct)


do i add the 1$ tax to the price and determine the new quantity consumed and then the new surplus, or do i just subtract $1*4 bottles from the current surplus?

I hope that you found this answer useful towards your studies. It took a considerable amount of thought, time, and effort to compose, and and I'd sincerely appreciate a lifesaver rating! It would really make my day! :)

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