1. Compact disc market:
b) P = $20; Q = 8 or 9
c) CS = $260; PS = $75; Social Welfare = $335
d) With a price ceiling at $15, the Qd = 14 and the Qs = 5,
therefore a shortage of 9 units exists. CS = 210; PS = $50, and Social Welfare =
$260. Deadweight loss = $75
e) With a price floor at $50, the Qd = 4 and the Qs = 15,
therefore a surplus of 11 units exists. CS = 40; PS = 435; Taxpayers must
pay $550, so the net social welfare = 40 + 435 - 550 = -75.
f) P = 40; Q = 8. The buyers end up paying the entire
tax since their demand is perfectly inelastic over the relevant region.
2. False. A tax on employers will reduce their demand for workers. The lower demand will cause wages and employment to drop. Thus, part of the tax on employers will show up in the form of lower wages for workers. The ultimate economic burden of the tax depends on the elasticity of demand and supply.
3. A shortage occurs whenever the quantity demanded is greater than the quantity supplied at a given price. Except for covering certain medical expenses, it is illegal for money to change hands between the birth mother and adoptive parents. Thus, the price of an adopted baby is regulated to be essentially zero. Adopted children must be allocated by some non-price method such as the financial stability or racial background of the adopted parent(s).
4. This is in your notes and the text.
5. The government could have simply imposed a stiff tax on the alcoholic beverages. The effect of the tax would have been equivalent to prohibition in terms of its effect on price and quantity.
6.
7. Consumer do end up paying for some of the agricultural subsidies that farmers enjoy through higher food prices. Taxpayers, however, 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.
8.
9. a) W = $5; Employment = 24; No unemployment.
b) Qd = 20; Qs = 26; Unemployment is 6 million hours per week.
10. 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.
11. 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).
12. Coffee
a) P = $2.00; Q = 50
b) P = $2.25; Q = 30; Consumers pay $0.25 and producers pay $0.50
of the $0.75 tax.
13. Market failure is the inability of a private unregulated market to attain efficiency, where efficiency is defined as marginal social benefits = marginal social cost. Three broad problems can lead to market failure: monopoly, public goods, and externalities.
14. Rational ignorance suggests that people will not spend a lot of time and money worrying about every piece of legislation debated by governments. Special interest groups, however, will attempt to manipulate the political process to their advantage in order to secure concentrated benefits at taxpayer expense.
15. This is straight out of your notes and the textbook.
16.
17.
18. Median voter model:
a) Kramer is the median voter and the parties will propose a tax
rate to appeal to him, namely, 30%.
b) Jerry is now the median voter and the parties will propose a
tax rate to appeal to him, namely, 40%.
c) Kramer becomes the median voter again, and a tax rate of 30%
will be proposed.
19. See #14 above and think about agricultural price supports.
20 . Mosquito abatement program.
a) Under majority rule, only Charlie would vote in favor of the
abatement program (since he values the program at $100, which is
more than the cost to each owner of $35). Thus, the abatement
program would not be approved. From society's point-of-view this
would be inefficient since the total value of the program to the
three guys ($120) is greater than the total cost ($105).
b) Unanimity could be reached by having Charlie subsidize Art and
Bob's "tax bill." Assuming Art and Bob are willing to
pay their values, Charlie could pay $34 on behalf of Art and $16
on behalf of Bob in order to pay for the abatement program. All
parties would thus benefit.
21. The class in which students earn their own grades will have the higher class average. The class in which students earn the class average as their grade will attract a lot of free riders. The free riders are likely to be (how should I say) academically-challenged, thereby ensuring an overall lower class average.
22. How would you argue?
23. We did this one in class.
24. Does it matter whether the people living around the airport came after the airport was built? Does it matter if housing prices have adjusted over time in response to the situation? Why or why not?
25. Fishermen and sludge.
a) The fishermen will buy the nets at a cost of $2750.
b) The factory will buy the nets for the fishermen at a cost of
$2750.
c) The tax is likely to be set equal to the damage done by the
sludge to the fishermen, namely, $4000. Given this potential tax
liability, the factory will try to minimize its costs by avoiding
the tax. Since the factory is precluded from bargaining with the
fishermen as in part (b), they will be unable to buy the net
system. The next best option is to install the water filter
system at a cost of $3500 (which is better than paying $4000 in
taxes).
d) As Coase would argue, the outcomes in parts (a) and (b) are
identical: as long as property rights are well-defined and
transaction costs are low, private bargaining will result in the
most efficient outcome. In this case, efficiency requires that
the nets be used. However, in part (c), transactions costs were
high enough to prevent bargaining so that only a "second
best" outcome prevailed.
26. We did this one in class.