184 Perloff • Microeconomics: Theory and Applications with Calculus, Third Edition
5.6 The welfare loss from the tax is equal to area abc. If the ad valorem tax is levied on firms, then the
supply curve will shift leftward. Also note that it is not a parallel shift—as the price goes up, the
5.7 If the tax is based on economic profit, the tax has no long-run effect because the firms make zero
5.8 A lump sum tax of ℒ raises costs by ℒ/q, and results in a reduction in consumer surplus of ℒ/q*(
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5.9 See figure below. Producer subsidies shift supply, and subsidies to cotton-consuming firms shift
demand, as indicated above. Consuming firms experience a price reduction from P0 to PC, while cotton
5.10 a. The initial equilibrium is determined by equating the quantity demanded to the quantity supplied:
s
b. Consumer surplus rises from
1
12
(10 5)50 125CS =−=
to
1
22(10 4)60 180.CS =−=
Producer
1
1
5.11 a. With the price ceiling, the equilibrium will be p = 3 and Q = 30.
b. The consumer surplus increases by 2(30) − 2(50 − 30)/2 = 40, producer surplus decreases by 2(50
186 Perloff • Microeconomics: Theory and Applications with Calculus, Third Edition
5.12 With the price increase, producers gain A but lose D. The payment x must be enough to compensate
producers for their net loss from the price increase (x = D − A). With this payment, producer welfare
5.13 The price ceiling (pc) on gasoline reduces welfare by the areas abd + bcd. The new consumer surplus
is area gacf, and producer surplus falls to area fch.
188 Perloff • Microeconomics: Theory and Applications with Calculus, Third Edition
6.1 The ban on self–serve gasoline shifts the supply curve, as gasoline vendors incur higher costs.
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6.2 a. The new equilibrium price will be lower and will be set equal to the U.S. price.
b. The new equilibrium price will be lower and the new equilibrium quantity will be higher in New
York, so consumer surplus for New Yorkers will increase.
than the change (decrease) in producer surplus, so welfare in New York will increase.
6.3 If we assume that the Canadian supply curve is perfectly elastic (horizontal) at the open–market price,
190 Perloff • Microeconomics: Theory and Applications with Calculus, Third Edition
6.4 There is no change in welfare associated with eliminating free trade because, with a domestic price
6.5 Without the tariff, the U.S. supply curve of oil is horizontal at a price of $14.70 (S1 in Figure 9.8), and
the equilibrium is determined by the intersection of this horizontal supply curve with the demand
192 Perloff • Microeconomics: Theory and Applications with Calculus, Third Edition
6.7 Imposing the tariff might well raise the welfare of an importing country as the gain in government
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6.9 U.S. corn subsidies, while hurting Mexican corn producers, generate a gain in welfare for Mexico, as
194 Perloff • Microeconomics: Theory and Applications with Calculus, Third Edition
6.10 In the sugar market, the quota increases price, reduces output, and causes a deadweight loss of A. In
6.11 Consider an imported good first. With the embargo, the consumer surplus decreases by (B + C), and
