UNIVERSITY OF ZIMBABWE

DEPARTMENT OF ECONOMICS
ECON104: Principles of Microeconomics
TUTORIAL EXERCISES 5: Consumers, Producers and the Efficiency of Markets

1. How does elasticity affect the burden of a tax? Justify your answer using supply and demand
diagrams.

2. Use the diagram below to answer the following questions:

a) Which area represents producer surplus when the price is P1?

b) Which area represents producer surplus when the price is P2?

c) Which area represents the increase in producer surplus when the price rises from P1 to P2?

d) When the price rises from P1 to P2, which area represents the increase in producer surplus to
existing producers?

e) Which area represents the increase in producer surplus when the price rises from P1 to P2 due to
new producers entering the market?

3. Using the graph shown, determine the value of each of the following:
a) equilibrium price before the tax
b) consumer surplus before the tax
c) producer surplus before the tax
d) total surplus before the tax
e) consumer surplus after the tax
f) producer surplus after the tax
 g) total tax revenue to the government
h) total surplus (consumer surplus + producer surplus + tax revenue) after the tax
i) deadweight loss

4. Use graphs to show how market failure can be corrected for both types of externalities.

5. Define and give examples of public goods.

6. Key Terms Quiz — Match the terms on the left with the definitions in the column on the right.

i. Third parties a. unintended costs or benefits imposed on third parties

ii. Market failure
iii. Externalities
iv. Public goods
v. Free rider
vi. Public choice
vii. Property rights
viii. Government failure
ix. Social cost
b. situation where one side of the market (buyer or seller) has more
information than the other side (buyer or seller)
c. view that the allocation of public goods is determined by the need for
government officials to keep their jobs
d. the cost to society of producing a good including both the private
costs and the externalities costs
e. people upon whom the externalities are imposed
f. situation where individuals in a market (buyers or sellers) react to
market signals by altering their behavior in ways that undermine the
benefits others derive from the market
g. benefits from these goods aren’t diminished by consumption and
cannot be withheld from anyone
h. a group organized to influence government concerning the costs and
benefits of particular public goods
i. the failure of the market to achieve an optimal allocation of the
economy’s resources
x. Special-interest lobby j. someone who consumes a good or service without paying for it
xi. Asymmetric information k. the failure of government to buy the quantity of public goods that
generates maximum efficiency
xii. Moral hazard l. the right to own a good or service and to enjoy the benefits that the
use of the good or service provides