Exchange with Taxes The table below shows the marginal values for product X for five different individuals, A - E. The values are all in dollars. This table will be used to answer questions 1 - 9. For each question, assume that all transaction costs are zero and that when indifferent, sellers will sell and buyers will buy the marginal unit. Read each question carefully and make sure you understand the market conditions before answering. All of the questions are worth 5 points. TABLE I A B C D E Quantity MV Quantity MV Quantity MV Quantity MV Quantity MV 1 26 1 26 1 26 1 26 1 28 2 24 2 24 2 24 2 24 2 25 3 22 3 22 3 22 3 22 3 22 4 20 4 20 4 20 4 20 4 18 5 18 5 18 5 18 5 18 5 16 6 16 6 16 6 16 6 16 6 15 7 14 7 14 7 14 7 14 7 14 8 12 8 12 8 12 8 12 8 12 9 10 9 10 9 10 9 10 9 10 10 8 10 8 10 8 10 8 10 8 11 6 11 6 11 6 11 6 11 6 12 4 12 4 12 4 12 4 12 4 13 2 13 2 13 2 13 2 13 2 At the start A has 10 units of X, B has 4, C has 7, D has 9 and E has 2. a. what will be the equilibrium price? ____________ b. In equilibrium, how many units of X will each person own.? __ 2. Start over again. Everything is exactly the same as it was at the start of question 1 except that the government now levies an excise tax on the sellers of X equal to $4 per unit of X sold. a. What would the market price have to be in order to get A to sell 2 units of X? ____ b. What would the market price have to be in order to get B to buy 2 units of X? ____ c. If there is trade in this market with the government tax on X, what will be the equilibrium price? ____ d. How many units of X will each person own after trade? _____ e. How much of the tax per unit was the seller able to pass on to the buyers? ____ 3. Start over again. Everything is exactly the same as it was at the start of question 1 except that the government now levies an excise tax on the buyers of X equal to $4 per unit of X sold. a. What would the market price have to be in order to get A to sell 2 units of X? ____ b. What would the market price have to be in order to get B to buy 2 units of X? ____ c. If there is trade in this market with the government tax on X, what will be the equilibrium price? ____ d. How many units of X will each person own after trade? _____ e. How much of the tax per unit was the buyer able to pass on to the sellers? ____ f. How much total tax revenue did the government collect? ____ 4. Compare the equilibrium in question 2 with the equilibrium in question 3. a. How much, in total, did the buyers pay for each unit of X when the tax was levied on the buyer? ____ b. How much, in total did the sellers receive and get to keep for each unit of X they sold, when the tax was levied on the buyers? ___ c. How much, in total, did the buyers pay for each unit of X when the tax was levied on the sellers? ___ d. How much, in total, did the sellers receive and get to keep for each unit of X they sold, when the tax was levied on the sellers? ___ El ...

1. Exchange with Taxes
The table below shows the marginal values for product X for
five different individuals, A - E. The values are all in dollars.
This table will be used to answer questions 1 - 9. For each
question, assume that all transaction costs are zero and that
when indifferent, sellers will sell and buyers will buy the
marginal unit. Read each question carefully and make sure you
understand the market conditions before answering. All of the
questions are worth 5 points.
TABLE I
A
B
C
D
E
Quantity
MV
Quantity
MV
Quantity
MV
Quantity
MV
Quantity
MV
1
26
1
26
1
26

2. 1
26
1
28
2
24
2
24
2
24
2
24
2
25
3
22
3
22
3
22
3
22
3
22
4
20
4
20
4
20
4
20
4
18
5
18

3. 5
18
5
18
5
18
5
16
6
16
6
16
6
16
6
16
6
15
7
14
7
14
7
14
7
14
7
14
8
12
8
12
8
12
8
12

4. 8
12
9
10
9
10
9
10
9
10
9
10
10
8
10
8
10
8
10
8
10
8
11
6
11
6
11
6
11
6
11
6
12
4
12
4

5. 12
4
12
4
12
4
13
2
13
2
13
2
13
2
13
2
At the start A has 10 units of X, B has 4, C has 7, D has 9
and E has 2.
a. what will be the equilibrium price? ____________
b. In equilibrium, how many units of X will each person
own.? __
2. Start over again. Everything is exactly the same as it was
at the start of question 1 except that the
government now levies an excise tax on the sellers of X equal to
$4 per unit of X sold.
a. What would the market price have to be in order to get A
to sell 2 units of X? ____
b. What would the market price have to be in order to get B
to buy 2 units of X? ____

6. c. If there is trade in this market with the government tax on
X, what will be the
equilibrium price? ____
d. How many units of X will each person own after trade?
_____
e. How much of the tax per unit was the seller able to pass on
to the buyers? ____
3. Start over again. Everything is exactly the same as it was
at the start of question 1 except that the
government now levies an excise tax on the buyers of X equal to
$4 per unit of X sold.
a. What would the market price have to be in order to
get A to sell 2 units of X? ____
b. What would the market price have to be in order to get B
to buy 2 units of X? ____
c. If there is trade in this market with the government tax on
X, what will be the
equilibrium price? ____
d. How many units of X will each person own after trade?
_____
e. How much of the tax per unit was the buyer able to pass on
to the sellers? ____
f. How much total tax revenue did the government collect?
____
4. Compare the equilibrium in question 2 with the
equilibrium in question 3.

7. a. How much, in total, did the buyers pay for each unit of X
when the tax was levied on the
buyer? ____
b. How much, in total did the sellers receive and get to keep
for each unit of X they sold,
when the tax was levied on the buyers? ___
c. How much, in total, did the buyers pay for each unit of X
when the tax was levied on the
sellers? ___
d. How much, in total, did the sellers receive and get to keep
for each unit of X they sold,
when the tax was levied on the sellers? ___
Elasticity
5. Consider individual B in the table above. There are no
taxes. Assume that B has 0 units of X to start with.
a. What is the price elasticity of B’s demand curve
between the prices $24 - $22. ______
b. What is the price elasticity of B’s demand curve
between the prices $16 - $12? ______
c. What happens to B’s total expenditure on X when the
price goes from $24 to $22? ___
d. What happens to B’s total expenditure on X when the
price goes from $16 to $12? ____
6. Consider individual A in the table above. There are no
taxes. If A has 10 units

8. of X to start with,
a. What is the price elasticity of A’s supply curve
between the prices $24 - $22? _________
b. What is the price elasticity of A’s supply curve
between the prices $16 - $12? _________
7. This question concerns the incidence of an excise tax.
Suppose that the government levies an
excise tax of $1.00 per unit of X on the sellers of product X.
Assuming the normal downward sloping demand for X and the
upward sloping supply for X, some portion of this tax will be
paid by the sellers and some portion by the buyers. Holding
other things constant,
a. if the price elasticity of demand increases, the portion of
the tax paid by the seller will
__________ (increase, decrease, stay the same, not enough
information to tell).
b. if the price elasticity of supply increases, the portion
of the tax paid by the buyer will
__________ (increase, decrease, stay the same, not enough
information to tell).
c. if the price elasticity of demand increases, the total
revenue the government will get from
the tax will __________ (increase, decrease, stay the same, not
enough information to tell).
d. if the price elasticity of supply increases, the total
revenue the government will get from
the tax will __________ (increase, decrease, stay the same, not
enough information to tell).
Monopolies, Barriers to Entry and Open Markets

9. Price
Quantity
Total
Marginal
Total labor cost
Marginal
Average Total Cost
Revenue
Revenue
Cost
0
0
24
1
5
23
2
9
22

10. 3
12
21
4
16
20
5
21
19
6
27
18
7
35
17
8

11. 45
16
9
57
15
10
71
14
11
87
13
12
105
12
13

12. 125
11
14
147
10
15
171
9
16
197
8
17
225
7
18

13. 255
6
19
287
8. The table above shows the demand for product X facing a
monopolist and his
total labor costs for each quantity produced each year. For
now, assume that there are no other costs.
a. Complete the table above and then draw a graph
showing this producers
average total cost, marginal cost, demand and
marginal revenue
b. Assuming that this monopolist produces X, how many
units would he
choose to produce each year? ___
c. At the output rate chosen in b, what would be his
yearly profit? _____
d. What do we know about the coefficient of price
elasticity of demand between the output rate of 12
and 13.? ____
e. What is the marginal revenue over the segment of the
demand curve in d?

14. 9. This monopolist has a patent which gives him the
exclusive right to produce X. This patent can be sold to another
producer, who would then have the exclusive rights to product
X. Assume that the profit that you calculated in question 1c can
be earned each year, the patent protection lasts forever and the
interest rate is 5%. There are a number of other producers of X
who have the same production costs as our monopolist, however
in order to produce and sell product X they will have to
purchase the patent from the current monopolist. If they do buy
the patent, they will become the monopolist producing and
selling product X. (You will find some clues that will help you
answer these next questions in the chapter on Alternative
Market Structures in the “insight” box on Taxi Medallions.)
a. At what price would the patent sell? _____
b. Suppose that someone, person B, purchases the patent
at the price
determined in a. What will happen to this producers
total cost per year? ______ If it changes, how
much will it change? _____
c. What will happen to B’s average total cost? ____ If it
changes, how much will it change? _____
d. Draw this new average total cost curve in the
monopoly graph you drew for 1a Label it.
e. Having just bought the patent, how many units of X
will the new
monopolist produce each year? _____
f. What price will the new monopolist charge per unit of
X? ___
g. Given your answers to 9b, e and f, how much profit

15. will B earn each year? ____
10. There is usually something that keeps potential
competitors out of a profitable
market. Very often, this “barrier” to entry is created by the
government. In our example in question 9, the barrier was a
patent. Suppose that this patent only lasts 17 years and then it
expires. After this, anyone can enter the market and produce
and sell product X.
a. Let us continue from question 9. The patent for X
has just expired. There
are other potential producers of X who have the same
production costs as our monopolist. As these potential
producers are attracted into the market by the profit, what
happens to the market price of X? ________
b. At some point entry will stop. Describe the market
conditions at this point. ____
c. Assuming a large number of competitors have entered
the market for X, such that it is now a price
takers market, what price would we expect for product X?
______
Property Rights.
There is a gas station that is currently selling gasoline to retail
customers along a freeway in northern Indiana. Like most
gasoline stations, the owner of this station stores his gas in
underground tanks. Unfortunately, one of the tanks has a leak
and 12 gallons of gasoline per year are seeping into the water
table that empties into a well owned by a nearby resident. The
table below shows the number of gallons of gasoline that are
leaking each year and the total cost to the station owner of
reducing or stopping the leak. For example, to reduce the rate

16. of leakage from 12 to 11gallons per year would cost the station
owner $6. To reduce the flow from 12 to 10 gallons would cost
$20, and so on. The leaking gasoline creates harmful effects on
the nearby resident by polluting his water supply. The table
shows the total value of those harmful effects to the resident.
For example, one gallon leaked per year imposes $3 in total
harm to the resident: two gallons leaked per year imposes $21 in
total harm, and so on. Unless told otherwise, assume that
transaction costs are zero.
Gallons Leaked
Total Cost
Total Harm
per year
to station owner to stop leak
to resident
0
608
$0
1
498
$3
2
403
$21
3
322
$78
4
252
$150
5
192
$241
6
139

17. $346
7
97
$476
8
64
$632
9
39
$833
10
20
$1,103
11
6
$1,403
12
0
$1,803
11. a. If nobody owned the exclusive and transferable rights
to pollute the underground
water, and there were no regulations on gasoline
leaks, how many gallons of gasoline would the
station owner choose to leak each year? _________
b. Why? ________________
c. What is the total harm that the chosen leak rate
imposes on the resident? ____________
12. a. If the government adopted an anti-leak policy
designed to minimize
the harmful effects imposed upon the station owner
and resident by each other’s behavior. How
many gallons of gasoline would the government allow the

18. station to leak each year? _______
b. How much harm does this impose on the resident?
_______________
c. How much harm does this impose on the station
owner? _____________
d. What is the total harm this does to both individuals?
_________________
13. a. Suppose the government assigns the exclusive, but
not transferable, rights to pollute the ( water to the
resident. How much gasoline will the station owner be allowed
to leak each year?________
b. If the government assigns the exclusive and
transferable rights to pollute
the water to the resident, how much gasoline will the
station owner be allowed to leak each year?
__________
c. How much harm will this leaking gasoline cause in
total to the station owner and the resident? ____
14. a. Suppose that the government changes its mind and
gives to the station owner the
exclusive, but not transferable, rights to pollute the
water. How much gasoline will the station
owner choose to leak each year? ____________
b. If the government gives the station owner the
exclusive and transferable rights to pollute the
water, how much gasoline will the station owner choose to leak
each year? ___

19. c. How much harm will this leaking gasoline cause in
total to the station owner and the resident? ____
Market Exchange and Price Controls
The table below shows the marginal values for product X for
five different individuals, A - E. The values are all in dollars.
This table will be used to answer questions 1 - 10. For each
question, assume that all transaction costs are zero and that
when indifferent, sellers will sell and buyers will buy the
marginal unit. Read each question carefully and make sure you
understand the market conditions before answering. All of the
questions are worth 5 points.
A
B
C
D
E
Quantity
MV
Quantity
MV
Quantity
MV
Quantity
MV
Quantity
MV
1
52
1
40
1
48
1

20. 64
1
68
2
48
2
36
2
40
2
60
2
64
3
44
3
32
3
36
3
56
3
60
4
40
4
24
4
32
4
52
4
56
5
36
5

21. 22
5
24
5
44
5
50
6
32
6
20
6
22
6
40
6
46
7
24
7
16
7
20
7
36
7
44
8
22
8
4
8
16
8
32
8

22. 40
9
20
9
2
9
4
9
24
9
36
10
16
10
1
10
2
10
22
10
32
11
4
11
0
11
1
11
20
11
24
1. We will start by giving A and C 7 units of X and E will be
given 5 units of X. B and D
(5) will have zero units of X.

23. a. What will be the equilibrium price in a market
consisting of these five
individuals? ___
b. After trading at the equilibrium price, how many
units of X will each
person own? ____________________
2. Start over again with the same market conditions as in
question 1 The government
(5) believes that the price of X is too high because the sellers
of X are greedy capitalist pigs, exploiting the poor buyers.
Therefore the government puts a price ceiling on X at $24
that can be costlessly enforced such that no seller can
receive a price greater than $24 for each X sold.
a. At the ceiling price, how many units of X would A, C, and
E be willing to sell? _________
b. At the ceiling price, how many units of X would the buyers
want to buy?
c. At the ceiling price, will their be a shortage or a surplus in
the market for X? _________
3. One way to resolve the problem identified in question 2c is
for the sellers of X to require
(5) the buyers of X to purchase something else, a unit of Y,
that is not price controlled. For each unit of Y that the
buyers purchase, they will receive one unit of X at a zero price.
Suppose that Y is nothing more than a piece of paper with the
sellers “autograph” written on it. Since each unit of X is
given away at zero price, this “tying” arrangement is legal.
a. What would be the market price of each autographed
piece of paper? _______

24. b. How many autographs would each individual
purchase? _______
c. How does the resulting equilibrium compare to the
equilibrium in #1? In answering this, compare the price paid by
the buyers of X (prices of X and Y) and the resulting quantities
of X that each person owns after the trade.___________
4. Suppose the price control in question 2 can be enforced
such that the sellers can receive
(10) nothing of value in excess of the $24 per unit of X. The
autograph scheme used in 3 is no longer legal. Assume that the
government chooses to resolve the rationing problem by issuing
4 “ration coupons.” Each coupon would entitle the holder to
buy one unit of X at the price of $24. No individual can
purchase X without a ration coupon and the coupon can only be
used once to buy a unit of X. To start, the government gives
the 4 coupons to individual B at no cost to B. The coupons can
be bought and sold.
a. What would be the market price of each of the ration
coupons? ________
b. At the price in 4a, how many ration coupons would each
person purchase? ___
c. How many units of X would each person own after using
the ration coupons to purchase X? ____________
d. What is the total price of X (coupon price + ceiling price)
that each buyer paid for each unit of X? ___________