1. Compact disc market
a) See the graphs we drew in class.
b) P = $25; Q = 9
c) CS = $60; PS = $120; W = CS + PS = $180
d) Qd = 10; Qs = 5; shortage of 5 units; CS = $110; PS = $50; W =
$160.
e) Qd = 4; Qs = 9; surplus of 5 units; CS = $40; PS = $100; W =
$140
f) P = $25; Q = 5; Sellers end up paying for all of the tax.
2. This one is straight out of your notes and Chapter 6.
3. Deadweight loss is a reduction in social welfare due to an inefficient amount of production within a market. Deadweight loss can occur if production is less than the efficient level and it can also occur if production is more than the efficient level. The efficient level of production is defined as that where marginal benefit equals marginal cost. If MB > MC for some given production level, then production is too low: an increase in production would add more to total benefits than the additions to total costs such that total net benefits would be increased. If MB < MC for some given production level, then production is too high: a further increase in production would add more to costs than benefits--implying that production should be decreased if you want to increase total net benefits.
4. Sally earns consumer surplus equal to $500 (= 32,000 - 31,500).
5. False. As long as the price of hot dogs is lower than the consumers' willingness to pay, they will be earning consumer surplus. In a market transaction, both parties expect to benefit (ie, earn surplus).
6. False. A tax on employers will reduce the demand for labor. The lower demand will cause the equilibrium wage rate to fall and the equilibrium employment level to fall also. The ultimate economic burden of the tax depends on the elasticity of demand and supply.
7. This is for you to ponder.
8. Shortages and non-price rationing.
9. This is for you to ponder.
10. Review your notes and the text.
11. Consumer do end up paying for some of the agricultural subsidies that farmers enjoy through higher food prices. Taxpayers, howeverl, also end up paying more to help support farmers since the government will need to raise revenue from somebody in order to buy up the surpluses caused by the price floor.
12. This one is for you to ponder.
13. a) Consumer surplus in the market
equilibrium = A+B+C
b) Producer surplus in the market equilibrium = D+E+F
c) Total surplus in the market equilibrium= A+B+C+D+E+F
d) Consumer surplus under a maximum price of $10 = A+B+D
e) Producer surplus under a maximum price of $10 = F
f) Total surplus under a maximum price of $10 = A+B+D+F
g) Consumer surplus under a maximum quantity of 70 = A
h) Producer surplus under a maximum quantity of 70 = B+D+F
i) Total surplus under a maximum quantity of 70 = A+B+D+F
14. a) W = $5; Employment = 24; No
unemployment.
b) Qd = 20; Qs = 26; Unemployment is 6 million hours per week.
15. a) You should recommend items that have an
inelastic demand. A tax on sellers would cause the price to rise
and quantity demanded would fall by a relatively small amount.
The result is that tax revenue would increase.
b) You should recommend items that have an inelastic supply. A
tax on sellers would cause the price to rise by a relatively
small amount and equilibrium output would small by a small
amount.
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) Demand would fall: price and quantity of illegal drugs would
both fall.
b) Supply would fall: price of illegal drugs would rise while
quantity would fall.
c) No, a change in the price of illegal drugs can not tell us
whether a given antidrug policy was successful in reducing drug
consumption. A higher price could be the result of an increase in
demand (which would imply that consumption is rising). On the
other hand, a lower price could be the result of an increase in
supply (which would also imply that consumption is rising).
17. Suppose that demand for a good is subject to unpredictable fluctuations. Explain how inventory holders reduce the price variability of the good. Inventory holders reduce price fluctuations by buying when the price is "unusually" low and then selling their inventory when prices become "unusually" high. The effect of such behavior is too smooth out the price fluctuations over the market "season."