1. Residents of the town of Los Locos (population 100) like to
drive
noisy offroad vehicles, but they hate the disturbance and dust
caused by each others' vehicles. Each vehicle that is purchased
by a resident cause $20 worth of damage to each of the 100
residents. There are 20 residents who are willing to pay up to
$4000 for an offroad vehicle. There are 30 residents who are
willing to pay up to $3000 for an offroad vehicle and there are
50 residents who are willing to pay up to $2500 for an offroad
vehicle. The price of offroad vehicles is $1200. In the absence
of any governmental interference, how many residents of Los Locos
would buy offroad vehicles and how many people in Los Locos
would be better off if offroad vehicles were outlawed?
(a) 100 vehicles would be purchased and 80 residents would be
better off if they were outlawed.
(b) 50 vehicles would be purchased and nobody would be better off
if they were outlawed.
(c) 50 vehicles would be purchased and 50 residents would be
better off if they were outlawed.
(d) 20 vehicles would be purchased and 80 residents would be
better off if they were outlawed.
(e) 100 units would be purchased and all 100 residents would be
better off if they were outlawed.
2. Suppose that the town of Los Locos imposes a tax of $2000
on
every resident who buys an offroad vehicle and the town
distributes the revenues collected from the tax equally among all
residents of Los Locos. With the tax in place, how many people
in Los Locos will buy offroad vehicles and how much tax revenue
will the government distribute to each resident?
(a) 50 residents will buy offroad vehicles and each resident
will get a rebate of 1,000.
(b) 20 residents will buy offroad vehicles and each resident will
get a rebate of $400.
(c) Nobody will buy an offroad vehicle and there will be no
rebates.
(d) Everybody will buy an offroad vehicle and everyone will get a
rebate of $2000.
(e) None of the above.
3. The residents of Los Locos decided to vote on whether to impose
a
tax of $2000 on each offroad vehicle purchaser. (Assume that with
the tax in place, the amount of damage caused by each offroad
vehicle that is purchased is still $20 to each resident of Los
Locos.) In order to decide how to vote, each of them has to
figure out whether he or she will be better off with or without
the tax. Who would gain and who would lose from the tax on
offroad vehicles?
(a) The residents with low buyer values for offroad vehicles will
be better off with the tax than they were with no tax and the
residents with intermediate and high buyer values will be
worse off.
(b) Every resident will be worse off.
(c) The residents with high buyer values will be better off with
the tax and the residents with low buyer values will be worse
off with the tax.
(d) The residents with low buyer values and with intermediate
buyer values will be better off with the tax and the
residents with high buyer values will be just as well off
with the tax as without the tax.
(e) The residents with high buyer values would be worse off with
the tax, the residents with intermediate buyer values would
be exactly as well off with or without the tax and the
residents with low buyer values would be better off with the
tax.