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microeconomics

Questions and Answers of Microeconomics

5. The marginal cost, marginal social cost, and demand for fish are represented by the curves in the graph below.Suppose that there are no restrictions on fishing. (LO8-1)a. Assuming perfect
4. Would a high tax on oil significantly reduce the amount of pollution coming from the use of oil? Why or why not? (LO8-2)
3. How would an economist likely respond to the statement“There is no such thing as an acceptable level of pollution”? (LO8-1)
2. Is the marginal social benefit of a good that exhibits positive externalities greater or less than the private social benefit of that good? Why? (LO8-1)
1. State three reasons for a potentially beneficial role of government intervention. (LO8-1)
Q-10 If one accepts the three reasons for market failure, why might one still oppose government intervention?
Q-9 Would an economist necessarily believe that we should simply let the market deal with a pollution problem?
Q-8 Who would benefit and who would lose if an informational alternative to licensing doctors were used?
Q-7 How would you expect medical insurance rates to change if medical insurers could use information contained in DNA to predict the likelihood of major medical illnesses?
Q-6 Why is it so difficult for government to decide the efficient quantity of a public good to provide?
Q-5 What are two reasons to be dubious of solutions based on voluntary action that is not in people’s self-interest?
Q-4 In what sense is the tax incentive approach to externalities fair?
Q-3 It is sometimes said that there is a trade-off between fairness and efficiency. Explain one way in which that is true and one way in which that is false.
Q-2 If a positive externality exists, does that mean that the market works better than if no externality exists?
Q-1 Why does the existence of an externality prevent the market from working properly?
LO8-5 Explain why market failure is not necessarily a reason for government intervention.
LO8-4 Explain how informational and moral hazard problems can lead to market failure.
LO8-3 Define public good and explain the problem with determining the value of a public good to society.
LO8-2 Describe three methods of dealing with externalities.
LO8-1 Explain what an externality is and show how it affects the market outcome.
6. In 2004, the University of California education system drastically cut enrollment due to significant state budget cuts and asked 7,600 applicants to defer enrollment for two years after completing
5. The president of Lebanon Valley College proposed the following tuition program: provide a 50 percent tuition reduction for those graduating in the top 10 percent of their high school class, 33
4. The Pure Food and Drug Act of 1906 is known as“Dr. Wiley’s Law.” It is generally regarded by noneconomic historians as representing the triumph of consumer interests over producer
3. Can you suggest a tax system that led to this building style, which was common in old eastern European cities?
2. Because of the negative incentive effect that taxes have on goods with elastic supply, in the late 1980s Margaret Thatcher (then prime minister of Great Britain)changed the property tax to a poll
1. Many of the buildings in Paris have Mansard roofs, such as those shown in the photograph on page 147.a. What property tax structure would bring this about?b. Could you imagine a change in the
5. God sees all individuals as equal, and that what one does to the least of God’s children, one does to all. How does that approach to thinking about issues fit with the economic analysis that
4. The elasticity of the supply of labor in part determines who bears the burden of Social Security taxes. Those taxes are typically levied in matching 6.2 percent shares on workers’ wages and
3. Do Pierre, a software engineer earning $200,000 a year, and Sally, a single mother whose welfare benefits are about to expire, get equal weight in the measure of consumer surplus?
2. The chapter frames the issue of the effects of taxation in terms of its effects on producer and consumer surplus.a. What does that framework leave out of the analysis?b. How might one frame the
1. The quotation from Calvin Coolidge at the beginning of the chapter equates taxation to robbery.a. Is that a reasonable position to take?b. What alternatives to taxation could a country consider to
22. Given the graph below, up to how much would suppliers be willing to spend to restrict supply to Q 1 ? (LO7-4) Price Demand Q Quantity Supply
21. What is the general rule of political economy? Give an example from the real world. ( LO7- 4 )
20. Define rent seeking. Do firms have a greater incentive to engage in rent-seeking behavior when demand is elastic or when it is inelastic? ( LO7- 4 )
19. A political leader comes to you and wonders from whom she will get the most complaints if she institutes a price ceiling when demand is inelastic and supply is elastic. ( LO7- 3 )a. How do you
18. Use the graph below to answer the following questions: ( LO7- 3 )a. What are equilibrium price and quantity?b. What is producer surplus when the market is in equilibrium?c. What is consumer
17. Suppose government imposed a minimum wage above equilibrium wage. ( LO 7-3 )a. Assuming nothing else changes, what do you expect to happen to the resulting shortage of jobs as time progresses?b.
16. Demonstrate how a price floor is like a tax on consumers and a subsidy to suppliers. Label the following: tax on consumers, transfer of surplus to suppliers, and welfare loss. ( LO7- 3 )a. Who
15. In which case would the shortage resulting from a price ceiling be greater: when supply is inelastic or elastic?Explain your answer. ( LO7- 3 )
14. Calculate the percentage of the tax borne by the demander and supplier in each of the following cases: ( LO 7-2 )a. E D 0.3, E S 1.2b. E D 3, E S 2c. E D 0.5, E S 1d. E D 0.5, E S
13. Should tenants who rent apartments worry that increases in property taxes will increase their rent? Does your answer change when considering the long run? ( LO 7-2 )
12. Which good would an economist normally recommend taxing if government wanted to minimize welfare loss and maximize revenue: a good with an elastic or inelastic supply? Why? ( LO7- 2 )
11. What percentage of a tax will the demander pay if price elasticity of supply is 0.3 and price elasticity of demand is 0.7? What percentage will the supplier pay? ( LO 7-2 )
10. If the demand for a good is perfectly elastic and the supply is elastic, who will bear the larger share of the burden of a tax on the good where the tax is paid by consumers? ( LO 7-2 )
9. Suppose demand for cigarettes is inelastic and the supply of cigarettes is elastic. Who would bear the larger share of the burden of a tax placed on cigarettes? ( LO7- 2 )
8. What types of goods would you recommend that the government tax if it wants the tax to result in no welfare loss? Name a few examples. ( LO 7-2 )
7. If the federal government wanted to tax a good and suppliers were strong lobbyists, but consumers were not, would government prefer supply or demand to be more inelastic? Why? ( LO 7-2 )
6. Use the graph below that shows the effect of a$4 per-unit tax on suppliers to answer the following questions: ( LO 7-2 )a. What are equilibrium price and quantity before the tax? After the tax?b.
5. Demonstrate the welfare loss of: ( LO7- 2 )a. A restriction on output when supply is perfectly elastic.b. A tax t placed on suppliers.c. A subsidy s given to suppliers.d. A restriction on output
4. Minneapolis Federal Reserve Bank economist Edward Prescott estimates the elasticity of the U.S. labor supply to be 3. Given this elasticity, what would be the impact of funding the Social Security
3. How is elasticity related to the revenue from a sales tax? ( LO 7-2 )
2. Why does nearly every purchase you make provide you with consumer surplus? ( LO7-1)
1. Why isn’t the combination of consumer and producer surplus maximized if there is either excess demand or supply?
Q-10 Why do price controls tend to create ongoing shortages or surpluses in the long run?
Q-9 If supply is perfectly inelastic, will price controls cause a large shortage?
Q-8 How can an increase in productivity harm suppliers?
Q-7 Would a firm’s research and development expenditures be classified as rent seeking?
Q-6 Demonstrate the effect of an effective price ceiling on producer and consumer surplus when both supply and demand are highly inelastic.
Q-5 If Social Security taxes were paid only by employees, what would likely happen to workers’pretax pay?
Q-4 How much of a $100 tax would a consumer pay if elasticity of demand is .2 and elasticity of supply is 1.8?
Q-3 If a person has a highly elastic demand, will he likely bear a large or small percentage of the burden of a tax?
Q-2 Demonstrate the welfare loss of a tax when the supply is highly elastic and the demand is highly inelastic.
Q-1 If price moves from disequilibrium to equilibrium, what happens to the combination of producer and consumer surplus in the market?
LO7-4 Define rent seeking and show how it is related to elasticity.
LO7-3 Explain how government intervention is a type of implicit taxation.
LO7-2 Demonstrate the burden of taxation to consumers and producers.
LO7-1 Show how equilibrium maximizes producer and consumer surplus.
10. If there were only two goods in the world, can you say whether they would be complements or substitutes?Explain your answer.
9. Colleges have increasingly used price sensitivity to formulate financial aid. The more eager the student, the less aid he or she can expect to get. Use elasticity to explain this phenomenon. Is
8. In the discussion of elasticity and raising and lowering prices, the text states that if you have an elastic demand, you should hesitate to raise your price, and that lowering price can possibly
7. In 2004, Congress allocated over $20 billion to fight illegal drugs. About 60 percent of the funds was directed at reducing the supply of drugs through domestic law enforcement and interdiction.
6. Demand for “prestige” college education is generally considered to be highly inelastic. What does this suggest about tuition increases at prestige schools in the future?Why don’t colleges
5. Economists have estimated the demand elasticity for motor fuel to be between 0.4 and 0.85.a. If the price rises 10 percent and the initial quantity sold is 10 million gallons, what is the range of
4. A major cereal producer decides to lower price from$3.60 to $3 per 15-ounce box.a. If quantity demanded increases by 18 percent, what is the price elasticity of demand?b. If, instead of lowering
3. Why would an economist be more hesitant about making an elasticity estimate of the effect of an increase in price of 1 percent rather than an increase in price of 50 percent?
2. In the 1960s, coffee came in 1-pound cans. Today, most coffee comes in 11-ounce cans.a. Can you think of an explanation why?b. Can you think of other products besides coffee whose standard size
1. In the box “Geometric Tricks for Estimating Price Elasticity,”there are three statements about the elasticities of straight-line supply curves. One of those statements is that supply curves
6. Price elasticity is not just a technical economic concept. It also reflects the distribution of economic power—the bargaining power and economic opportunities of buyers and sellers.a. When
5. If elasticities are constantly changing as the time period gets longer, how do managers use a measure of elasticity of demand to determine the price they charge? If they don’t use elasticities,
4. In the chapter, you saw that an increase in Vermont’s minimum wage stimulated a small quantity response.a. What does this tell you about the nature of the labor market in Vermont? (Hint: Think
3. Early economists made a distinction between needs and wants. Needs were economists’ concern; wants were of far less importance.a. Is such a distinction useful?b. Would making such a distinction
2. In this chapter, we learn that most new cars aren’t sold at their list price but are sold at a discount and that this allows dealerships to charge more to customers with inelastic demand. At the
1. The text tells us that there are long-run elasticities and short-run elasticities.a. How long is the long run and how long is the short run?b. What meaning do the elasticity measures have if you
22. For each of the following assume that the supply curve shifts while the demand curve remains constant. What is the direction of the supply shift and relative elasticity of demand? (LO6-5)a. Price
21. Would a shift in demand have a greater effect on the percentage change in equilibrium quantity for a straightline supply curve that intersects the quantity axis or the price axis? (LO6-5)
20. Would you expect a shift in supply to have a greater effect on equilibrium quantity in the short run or in the long run? Explain your answer. (LO6-5)
19. Calculate the income elasticities of demand for the following: (LO6-4)a. Income rises by 20 percent; demand rises by 10 percent.b. Income rises from $30,000 to $40,000; demand increases(at a
18. When the price of ketchup rises by 15 percent, the demand for hot dogs falls by 1 percent. (LO6-4)a. Calculate the cross-price elasticity of demand.b. Are the goods complements or substitutes?c.
17. For each of the following pairs of goods, state whether the cross-price elasticity is likely positive, negative, or zero.Explain your answers. (LO6-4)a. Lettuce, carrots.b. Housing, furniture.c.
16. For each of the following goods, state whether it is a normal good, a luxury, a necessity, or an inferior good. Explain your answers. (LO6-4)a. Vodka.d. Perfume.b. Table salt.e. Beer.c.
15. Which of the following producers would you expect to support a tax on beer? Which would not? Explain your answer. (LO6-4)a. Producers of hard liquor. Cross-price elasticity with beer: 0.11.b.
14. According to Exhibitor Relations Co., in 2006 average movie ticket prices were $6.55 and attendance was 1.4 billion; in 2007 ticket prices were $6.88 and attendance was 1.41 billion. (LO6-3)a.
13. How is elasticity related to the revenue from a sales tax? (LO6-3)
12. University of Richmond Professor Erik Craft analyzed the states’ pricing of vanity plates. He found that in California, where vanity plates cost $28.75, the elasticity of demand was 0.52. In
11. Once a book has been written, would an author facing an inelastic demand curve for the book prefer to raise or lower the book’s price? Why? (LO6-3)
10. A newspaper recently lowered its price from 50 cents to 30 cents. As it did, the number of newspapers sold increased from 240,000 to 280,000. (LO6-3)a. What was the newspaper’s elasticity of
9. Kean University Professor Henry Saffer and Bentley University Professor Dave Dhaval estimated that if the alcohol industry increased the prices of alcoholic beverages by 100 percent underage
8. Economists have estimated the following transportation elasticities. For each pair, explain possible reasons why the elasticities differ. (LO6-2)a. Elasticity of demand for buses is 0.23 during
7. Which of the pairs of goods would you expect to have a greater price elasticity of demand? (LO6-2)a. Cars, transportation.b. Housing, leisure travel.c. Rubber during World War II, rubber during
6. Calculate the elasticity of the designated ranges of supply and demand curves on the following graph. (LO6-1) Price $40 35 30 25 20 15 B G F 10 5 0 H D C 10 20 30 40 50 60 70 80 90 100 110 120

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