UNIVERSITY OF THE PHILIPPINES

SCHOOL OF ECONOMICS
ECONOMICS 100.2
Introduction to Microeconomic Theory and Policy
Problem Set No. 3

Prof. Aleli Kraft / Ang / Panti / Siton 2nd Semester, AY 2016-2017

I. Multiple Choice

For questions 1 and 2, see Figure 1

Figure 1

1. If the price of the good is Php 14, then producer surplus is

a. Php 17.
b. Php 22.
c. Php 25.
d. Php 28.

2. If the price of the good is Php 9.50, then producer surplus is

a. Php 2.50.
b. Php 6.50.
c. Php 8.00.
d. Php 10.00.
For questions 3 and 4, see Figure 2.

Figure 2
3. The equilibrium price is
a. P1.
b. P2.
c. P3.
d. P4.

4. At equilibrium, consumer surplus is represented by the area

a. A.
b. A+B+C.
c. D+H+F.
d. A+B+C+D+H+F.

5. Total surplus in a market is equal to

a. consumer surplus + producer surplus.
b. value to buyers - amount paid by buyers.
c. amount received by sellers - costs of sellers.
d. producer surplus - consumer surplus.

6. Which of the following tools help us evaluate how taxes affect economic well-being?
(i) consumer surplus
(ii) producer surplus
(iii) tax revenue
(iv) deadweight loss
a. (i) and (ii) only
b. (i), (ii), and (iii) only
c. (iii) and (iv) only
d. (i), (ii), (iii), and (iv)
7. Taxes cause deadweight losses because they
a. lead to losses in surplus for consumers and for producers that, when taken together,
exceed tax revenue collected by the government.
b. distort incentives to both buyers and sellers.
c. prevent buyers and sellers from realizing some of the gains from trade.
d. All of the above are correct.

8. In the market for widgets, the supply curve is the typical upward-sloping straight line, and the
demand curve is the typical downward-sloping straight line. The equilibrium quantity in the
market for widgets is 200 per month when there is no tax. Then a tax of Php 5 per widget is
imposed. The price paid by buyers increases by Php 2 and the after-tax price received by sellers
falls by Php 3. The government is able to raise Php 750 per month in revenue from the tax. The
deadweight loss from the tax is
a. Php 250.
b. Php 125.
c. Php 75.
d. Php 50.

9. When the price of a good is measured in dollars, then the size of the deadweight loss that results
from taxing that good is measured in
a. units of the good that is being taxed.
b. units of a related good that is not being taxed.
c. dollars.
d. percentage change.

10. The supply curve for cameras is the typical upward-sloping straight line, and the demand curve
for cameras is the typical downward-sloping straight line. When cameras are taxed, the area on
the relevant supply-and-demand graph that represents
a. governments tax revenue is a rectangle.
b. the deadweight loss of the tax is a triangle.
c. the loss of consumer surplus caused by the tax is neither a rectangle nor a triangle.
d. All of the above are correct.
II. Word Problems

1. It is a hot day, and Bert is thirsty. Here is the value he places on a bottle of water:
Value of first bottle Php 7
Value of second bottle 5
Value of third bottle 3
Value of fourth bottle 1
a. From this information, derive Berts demand schedule. Graph his demand curve for
bottled water.
b. If the price of a bottle of water is Php 4, how many bottles does Bert buy? How much
consumer surplus does Bert get from his purchases? Show Berts consumer surplus in
your graph.
c. If the price falls to Php 2, how does quantity demanded change? How does Berts
consumer surplus change? Show these changes in your graph.

2. Given the following information:

Price (in Php) Demand Supply

10 60 30

20 20 45

a. Find the demand and supply equations (assuming linear curves).

b. Graph the equations together on one plane.
c. Assuming that the market is perfectly competitive, shade and label the portion
corresponding to the consumer and producer surplus.
d. Solve for the consumer and producer surplus.

3. Suppose the government imposes a Php 5 tax.

a. How would the graphs in 2b adjust? Draw another graph with consumer and producer
surplus, tax revenue and deadweight loss properly shaded and labeled.
b. Solve for the new consumer and producer surplus, tax revenue and deadweight loss.