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foundations of microeconomics

Questions and Answers of Foundations Of Microeconomics

Explain how a production quota works, and why it brings a higher price and is inefficient and unfair.7.3
You also encounter price floors in markets for food. You pay more for tomatoes, sugar, oranges, and many other food items than the minimum cost of producing them.Develop your own policy position on
You encounter a price floor in the labor market. Have you wanted a job and been willing and available to work, but unable to get hired? Would you have taken a job for a slightly lower wage if one had
Unless you live in New York City, you’re not likely to live in a rent controlled house or apartment. Because economists have explained the unwanted effects of rent ceilings that you’ve learned
Price ceilings and price floors operate in many of the markets in which you trade, and they require you to take a stand as a citizen and voter.
A production quota is unfair on both views of fairness: It delivers an unfair result and imposes unfair rules. The result is unfair because well-off farmers benefit and consumers lose. A production
The farmers’ gain is smaller than the consumers’ loss—the outcome is inefficient and a deadweight loss arises. The decreased quantity is valued on the demand curve more highly than its marginal
Consumers lose, but dairy farmers gain. They produce a smaller quantity but sell it for a higher price. And the higher price more than counters the smaller quantity because the demand for dairy
Figure 7.9(b) illustrates the effects of a production quota in this market.The government sets a production quota for the market of 40 billion pounds per year and allocates quotas to each producer
The Market with an Effective Production Quota
In Figure 7.9(a) , with no production quota, the equilibrium price is 10 cents per pound and the equilibrium quantity of dairy products is 60 billion pounds per year. The market is efficient because
(5) Consumer surplus shrinks, (6) producer surplus grows, and (7) a deadweight loss arises.With no quota, the market is efficient. With a quota, it is inefficient.Watch The Inefficiency of a
2) Consumer surplus plus (3) producer surplus is maximized.(4) The government imposes a production quota of 40 billion pounds per year.
(1) With no intervention, the market is competitive and the equilibrium price is 10 cents per pound and the equilibrium quantity of dairy products is 60 billion pounds per year.
Figure 7.9 The Inefficiency of a Production Quota In the market for dairy products:
To illustrate the effects of a production quota, we’ll use the example of the market for dairy products in California. Markets in milk, both liquid and powder, cheese, and other dairy products are
What do cranberries, peanuts, sugar, chicken, eggs, milk, cheese, and tobacco have in common?The answer is that production quotas have been used, either in the past or in the present, to regulate the
To see how consumers lose and producers gain and to see why a production quota is inefficient and unfair, we’ll look at an example.EYE on the GLOBAL ECONOMY Production Quotas
To make a production quota effective—to successfully limit the quantity supplied—quotas must be allocated to each producer that sum to the market quota. Also, mechanisms must be used to prevent
A government can’t regulate the quantity supplied without isolating the domestic market from global competition. For this reason, production quotas usually are accompanied by import
So far in this chapter, we have examined the effects of government actions that seek to prevent the price from moving toward the equilibrium price. In this final section, we look at a market
Given the information about how many workers currently earn less than $15 an hour, we can infer that a minimum wage of $15 an hour exceeds the equilibrium wage rate. Setting the minimum wage at $15
. The minimum wage of $8 an hour is not efficient because it creates a deadweight loss—the marginal benefit to growers exceeds the marginal cost to workers. Tomato pickers who find work at $8 an
2. The minimum wage of $8 an hour is above the equilibrium wage rate, so 3,000 pickers are employed (determined by the demand) and 5,000 people would like to work as pickers for $8 an hour
1. The market equilibrium wage rate is $6 an hour, and 4,000 pickers are employed. The minimum wage of $4 an hour is below the equilibrium wage rate, so 4,000 tomato pickers are employed and no
Currently, more than 40 percent of employees and 96 percent of fast-food workers earn less than $15 an hour. The U.S.Chamber of Commerce and the National Restaurant Association oppose the increase
The labor movement is urging a minimum wage of $15 an hour.
Will the United States raise the minimum wage to $15?
3. If California introduces a minimum wage of $8 an hour, (a)is the minimum wage of $8 an hour efficient? (b) Who gains and who loses from the minimum wage of $8 an hour? Is it fair?Source: CBS News,
2. If California introduces a minimum wage of $8 an hour, how many tomato pickers are employed and how many are unemployed? What is the lowest wage that some workers might be able to earn if a black
1. If California introduces a minimum wage of $4 an hour, how many tomato pickers are employed and how many are unemployed?
Explain how a price floor works, and why the minimum wage creates unemployment and is inefficient and unfair.7.2 Figure 1 Practice Problems Figure 1 shows the market for tomato pickers in southern
7. The allocation of resources is fair .A. in the fair-rules view if everyone has equal opportunity B. in the fair-result view if most resources are distributed to the poorest people C. in the
6. Market failure arises if .A. there is overproduction of the good but not if there is underproduction B. the deadweight loss is zero C. producer surplus exceeds consumer surplus D. total surplus is
5. When the marginal benefit from a good exceeds its marginal cost,.A. there is overproduction of the good B. a deadweight loss, which is the excess of marginal benefit over marginal cost, arises C.
4. The market for a good is efficient if .A. the marginal cost of producing the good is minimized B. the marginal benefit from the good is maximized C. the consumer surplus is maximized D. the total
3. Choose the best statement.A. An increase in the demand for a good increases producer surplus.B. If producers decrease the supply of the good, their producer surplus will increase.C. Producer
2. All of the following statements are correct except .A. the value of an additional unit of the good equals the marginal benefit from the good B. marginal benefit is the excess of value over the
1. The method of allocation that most stores use during Thanksgiving sales is:A. a combination of market price and lottery B. first-come, first-served C. a combination of contest and command D. a
Is the U.S. timber industry efficient and do forest-land owners operate in the social interest or self-interest? What effect does private ownership have on the efficiency of the timber
U.S. forestland has been a constant 755 million acres for the past century, but the number of trees has increased by 20 percent since 1970, the volume of wood has doubled since 1953, and the United
9. Take pride in U.S. forests
6. If all water in California is sold for the market equilibrium price, would the allocation of water be more efficient? Why or why not? 
In a Dutch auction, the auctioneer announces the highest price. If no one offers to buy the flowers, the auctioneer lowers the price until a buyer is found.
Use the following information to work Problems 7 and 8 .The world’s largest tulip and flower market Every day over 19 million tulips and flowers are auctioned at the Dutch market called “The
3. Suppose that all salons agree to charge $40 a haircut. How do consumer surplus and producer surplus change? What is the deadweight loss created? Source: Tulip-Bulbs.com
2. What is the quantity of haircuts bought, the value of a haircut, and the total surplus from haircuts?
In California, farmers pay a lower price for water than do city residents.Use this information to work Problems 4 to 6 .
Why is a $1,667.82 ticket price similar to “price gouging”? Is the high price an example of the market price method of allocating scarce resources? Is the market for tickets efficient? Is it
Now that the New York Mets are in baseball’s World Series for the first time in 15 years, fans who don’t have a ticket will pay a hefty $1,667.82 to get one. That’s the average asking price for
1. Mets World Series ticket prices spike after NLCS win
Table 1 shows the demand schedule for haircuts and the supply schedule of haircuts. Use Table 1 to work Problems 2 and 3 .MyEconLab Homework, Quiz, or Test if assigned by instructor Source: CNBC.com,
12. Read Eye on Price Gouging and explain why it was inefficient to stop Mr. Shepperson from selling his generators.Instructor Assignable Problems and Applications
11. eBay saves billions for bidders On eBay, the bidder who places the highest bid wins the auction and pays only what the second highest bidder offered.Researchers Wolfgang Jank and Galit Shmueli
10. The winner of the men’s or women’s tennis singles at the U.S.Open is paid twice as much as the runner-up, but it takes two players to have a singles final. Is this compensation arrangement
9. Would the outcome be more efficient than if the government took no action? Explain.Source: InformationWeek, January 28, 2008
7. If Sandwiches To Go, Inc., buys all the sandwich producers and cuts production to 100 sandwiches an hour, what is the deadweight loss that is created? If Sandwiches To Go, Inc., rations sandwiches
6. If the quantity supplied decreases by 100 sandwiches an hour at each price, what is the equilibrium price and what is the change in total surplus?
Use the following information to work Problems 8 and 9 .Table 2 shows the demand and supply schedules for sandbags before and during a major flood. During the flood, suppose that the government gave
5. If the quantity demanded decreases by 100 sandwiches an hour at each price, what is the equilibrium price and what is the change
4. Calculate the equilibrium price of a sandwich, the consumer surplus, and the producer surplus. What is the efficient quantity of sandwiches?
6.5 Key Terms MyEconLab Key Terms Quiz Allocative efficiency Big tradeoff Command system Consumer surplus Deadweight loss Market failure Producer surplus Total surplus Transactions
Evaluate the efficiency of the alternative methods of allocating resources.6.4
Producer surplus equals the excess of price over marginal cost, summed over the quantity produced.In a competitive equilibrium, marginal benefit equals marginal cost and resource allocation is
A supply curve is a marginal cost curve.Opportunity cost is what producers must pay; price is what they receive.
Marginal cost is measured by the minimum price producers must be offered to increase production by one unit.
Distinguish between value and price, and define consumer surplus.6.2
Describe the alternative methods of allocating scarce resources, and define and explain the features of an efficient allocation.6.1
3. An environmental lobbying group persuades the government to pass a law that limits the quantity of paper that producers sell to 20 tons a day. Is the market for paper efficient? If not, what is
2. Lobbyists for a group of news magazines persuade the government to pass a law that requires producers to sell 50 tons of paper a day. Is the market for paper efficient? Explain your answer and
1. At the market equilibrium, what are consumer surplus, producer surplus, and total surplus? Is the market for paper efficient? Why or why not?
There is no one mechanism for allocating resources efficiently. But markets bypassed by command systems inside firms and supplemented by majority rule and first-come, first-served do an amazingly
7. High transactions costs Command or first-come, first-served Managers in firms issue commands and avoid the transactions costs that they would incur if they went to a market every time they needed
Table 6.1 Market Failure and Some Possible Remedies Reason for market failure Possible remedy 1. Price and quantity regulations Remove regulation by majority rule 2. Taxes and subsidies Minimize
Table 6.1 summarizes the sources of market failure and the possible remedies. Often, majority rule might be used, but majority rule has its own shortcomings. A group that pursues the self-interest of
When transactions costs are high, the market might underproduce.Alternatives to the Market When a market is inefficient, can one of the alternative non-market methods that we described at the
To use market prices as the allocators of scarce resources, it must be worth bearing the opportunity cost of establishing a market. Some markets are just too costly to operate. For example, when you
Stroll around a shopping mall and observe the retail markets in which you participate. You’ll see that these markets employ enormous quantities of scarce labor and capital resources. It is costly
The self-interest of a monopoly is to maximize its profit. Because the monopoly has no competitors, it can set the price to achieve its selfinterested goal. To achieve its goal, a monopoly produces
A monopoly is a firm that is the sole provider of a good or service. Local water supply and cable television are supplied by firms that are monopolies.
A common resource is owned by no one but used by everyone. Atlantic salmon is an example. It is in everyone’s self-interest to ignore the costs that fall on others as a result of their own use of a
A public good benefits everyone and no one can be excluded from its benefits. National defense is an example. It is in everyone’s self-interest to avoid paying for a public good (called the
A condominium owner would provide an external benefit if she installed a smoke detector. But she doesn’t consider her neighbor’s marginal benefit and decides not to install a smoke detector. The
An externality is a cost or a benefit that affects someone other than the seller and the buyer of a good. An electric utility creates an external cost by burning coal that brings acid rain and crop
Taxes increase the prices paid by buyers and lower the prices received by sellers. So taxes decrease the quantity produced and lead to underproduction. Subsidies, which are payments by the government
Price regulations that put a cap on the rent a landlord is permitted to charge and laws that require employers to pay a minimum wage sometimes block the price adjustments that balance the quantity
Obstacles to efficiency that bring market failure and create deadweight losses are Price and quantity regulations Taxes and subsidies Externalities Public goods and common resources Monopoly High
A deadweight loss is the decrease in total surplus that results from inefficient underproduction or overproduction. It is a social loss.The deadweight loss from underproduction equals the area of the
(4) If production is 15,000 pizzas a day, (5) pizzas produced cost more to make than they are worth—there is inefficient overproduction. (6) The gray triangle shows the deadweight loss that
(1) If production is 5,000 pizzas a day, (2) pizzas not produced are worth more than they cost to make—there is inefficient underproduction. (3)The gray triangle shows the deadweight loss that
When underproduction occurs, marginal benefit exceeds marginal cost.Items not produced are worth more than they cost. When overproduction occurs, marginal cost exceeds marginal benefit. Items
You’ve seen that a competitive market in equilibrium delivers an efficient outcome. But not all markets are competitive and sometimes a competitive market is prevented from achieving an
The electronic auction site eBay (http://www.ebay.com/) has brought a huge increase in consumer surplus and producer surplus, and helps to achieve ever-greater allocative efficiency.Market Failure
New technologies have cut the cost of using the Internet and during the past few years, hundreds of Web sites have been established that are dedicated to facilitating trade in all types of goods,
The umbrella has moved to its highest-valued use and the resource is being used efficiently.The market economy performs activity similar to that illustrated in the cartoon to achieve an efficient
After the transaction (bottom frame), the vendor obtains a producer surplus from selling the shade for more than its opportunity cost, and the reader obtains a consumer surplus from buying the shade
A transaction occurs and the invisible hand does its work (the middle frame). The park bench reader buys the vendor’s sun shade. This transaction tells us that the reader’s marginal benefit from
You can see Adam Smith’s invisible hand idea in the cartoon.On a hot sunny day, a cold-drinks vendor approaches a man sitting in a park reading a newspaper (the top frame). The vendor has both cold
Adam Smith explained why all this amazing activity occurs. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,” he wrote, “but from their regard
No government organizes all this production, and no government auditor monitors producers to ensure that they serve the social interest. The allocation of scarce resources is not planned. It happens

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