Do You Zhlurp?
The citizens of Kendallville love Zhlurp. Each resident of Kendallville has the following willingness to pay for the tasty refreshment:
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Number of bottles
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First bottle
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$5
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Second bottle
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4
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Third bottle
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3
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Fourth bottle
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2
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Fifth bottle
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Answer the following questions.
1. The cost of producing Zhlurp is $1.50, and all of the competitive suppliers sell it at this price. (The supply curve is horizontal; i.e., it is perfectly elastic.) How many bottles will each Kendallvillian consume? What is each person's consumer surplus? Please show your calculations.
2. The Kendallville Tribune reports that producing Zhlurp causes pollution! What type of externality is this called? The external cost of this pollution is $1 per bottle. Is the cost of this externality included in the private cost of a bottle of Zhlurp? What are the economic consequences of this pollution?
This type of externality is called a negative externality. No the externality is not included in the private cost of a bottle of Zhlurp. The economic consequences are
3. Taking this additional cost into consideration, what is the total surplus per person in the allocation described in (1) above? Show your calculations.
4. Austin Kendall, one of the residents of Kendallville, decides on his own to reduce his consumption of Zhlurp by one bottle. What happens to Austin's welfare (his consumer surplus minus the cost of pollution he experiences)? How does Austin's decision effect the total surplus in Kendallville?
5. Mayor John imposes a $1 tax on Zhlurp. What is the consumption per person now? Calculate consumer surplus, the external cost, government revenue, and total surplus per person. Show your calculations.
6. Based on your calculations, would you support Mayor John's tax policy? Why or why not?