Econ 211
Problem Set 3
Fall 2000

1. The data in the table below refers to the compact disc market.

a) Plot the supply and demand curves based on this data. [Remember, these are going to be step functions.]
b) What is the competitive equilibrium price and quantity?
c) Calculate the value of each of the following at the competitive equilibrium: Consumer surplus, Producer surplus, and Social welfare
d) Suppose the government imposed a price ceiling at $15. What quantity would buyers demand? What quantity would sellers supply? Is there a shortage or surplus? How big is it? What happens to CS, PS, and Social Welfare?
e) Suppose the government imposed a price floor at $30. What quantity would buyers demand? What quantity would sellers supply? Is there a shortage or surplus? How big is it? What happens to CS, PS, and Social Welfare?
f) Suppose the government imposes a tax of $10 per unit on each seller. What would be the new equilibrium price and quantity? How much of the tax do the sellers end up paying? How much of the tax do the buyers end up paying?

2. What is consumer surplus? How do we measure consumer surplus? What is producer surplus? How do we measure producer surplus?

3. What is deadweight loss? Does a deadweight loss occur only if production is less than the efficient level?

4. A new car in the dealer's showroom had a sticker price of $35,900. Sally liked the car but decided she would pay no more than $32,000 for it, otherwise she would do without it. After haggling with the dealer, she purchased the car for $31,500. Did she gain any consumer surplus? If so, how much? If not, why not?

5. If the hot dog vendors at Yankee Stadium are earning a producer surplus on each hot dog they sell, then baseball fans cannot be achieving any consumer surplus on the hot dogs they buy. True or False? Explain.

6. True or false: Some cities raise revenue by levying a tax on employers equal to a certain number of dollars per employee per year. This is a good thing for workers, because workers are not taxed.

7. Far fewer babies are currently offered for adoption in the United States than couples want to adopt. Would you call this a shortage? Why doesn't the price of an adopted baby rise? By what criteria are the scarce babies rationed to demanders?

8. What are the major economic effects of rent ceilings?

9. In the 1930s the US federal government passed the Volstead Act, which prohibited the production, sale, purchase, and consumption of alcoholic beverages. Prohibtion encouraged bootlegging and black markets for whiskey, wine, and beer. What alternative economic policy was available to the government as a means of reducing alcohol consumption nationwide?

10. What are the economic arguments for and against drug prohibition?

11. Is the cost of agricultural price supports borne entirely by consumers who end up paying higher food prices at the supermarket?

12. The city of Berkeley, California, imposes strict rent controls; there are no rent controls in Gainesville, Florida. Both cities are the home of large universities. In which city do you expect incoming first-year students to have the least trouble renting an apartment? Why?

13. The figure below show a supply curve and a demand curve and several areas between the curves. Identify the areas on the figure that represent the following:

a) Consumer surplus in the market equilibrium
b) Producer surplus in the market equilibrium
c) Total surplus in the market equilibrium
d) Consumer surplus under a maximum price of $10
e) Producer surplus under a maximum price of $10
f) Total surplus under a maximum price of $10
g) Consumer surplus under a maximum quantity of 70
h) Producer surplus under a maximum quantity of 70
i) Total surplus under a maximum quantity of 70

14. The table below summarizes the labor market for unskilled workers in Ohio.

a) What is the equilibrium wage and employment level in this market? How much unemployment occurs at the equilibrium wage?
b) Suppose the Ohio state legislature imposes a minimum wage of $6.00 per hour on this market. What is the new quantity demanded of labor? What is the new quantity supplied of labor? How much unemployment is created by the minimum wage?

15. After graduating, you land a plush job advising the president on economic matters. One day the president asks you for your suggestions about products to tax.
a) The president asks you to produce a list of items to be taxed that will yield substantial tax revenue to the government and for which consumers pay a large amount of the tax. Without trying to name specific products, what is the general characteristics of the demand for the products that you will suggest be taxed? Why?
b) After you discuss this first list with the president, the president realizes that this is an election year. As a result, the president changes your assignment a bit. Now the president asks you for a list of products that will still yield a lot of revenue for the government, but whose tax will fall more heavily on producers. Again, without trying to name specific products, what is the general characteristics of the supply of the product that would comprise your second list? Why?

16. You are in charge of combatting illegal drugs in the United States. You must decide between imprisoning users or imprisoning sellers of drugs.
a) If you decide to imprison users, what effect do you expect this policy to have on the price and quantity of illegal drugs?
b) If you decide to imprison sellers, what effect do you expect this policy to have on the price and quantity of illegal drugs?
c) Without knowing which policy is being followed, can changes in the price of illegal drugs alone determine the success of a policy designed to reduce the consumption of illegal drugs?

17. Suppose that demand for a good is subject to unpredictable fluctuations. Explain how inventory holders reduce the price variability of the good.