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principles of economics

Questions and Answers of Principles Of Economics

This chapter analysed the welfare effects of a tax on a good. Consider now the opposite policy. Suppose that the government subsidizes a good: for each unit of the good sold, the government pays €2
Suppose that the government imposes a tax on heating oil.a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.b. Would the
Consider the market for rubber bands.a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use
Evaluate the following two statements. Do you agree?Why or why not?a. ‘A tax that has no deadweight loss cannot raise any revenue for the government.’b. ‘A tax that raises no revenue for the
Evaluate the following two statements. Do you agree?Why or why not?a. ‘If the government taxes land, wealthy landowners will pass the tax on to their poorer renters.’b. ‘If the government taxes
The market for pizza is characterized by a downwards sloping demand curve and an upwards sloping supply curve.a. Draw the competitive market equilibrium. Label the price, quantity, consumer surplus
What is the concept of horizontal equity, and why is it hard to apply?
Give two arguments why wealthy taxpayers should pay more taxes than poor taxpayers.
Why is the burden of a tax to taxpayers greater than the revenue received by the government?
Explain how corporate profits are taxed twice.
What are the four canons of taxation?
What happens to the deadweight loss and tax revenue when a tax is increased?
How do the elasticities of supply and demand affect the deadweight loss of a tax? Why do they have this effect?
Draw a supply and demand diagram with a tax on the sale of the good. Show the deadweight loss. Show the tax revenue.
What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus compare to the tax revenue? Explain.
What are the two main reasons that governments levy taxes?
There is a debate in a country about the higher education system. Some political parties want to promote the value of university education and give as many young people the chance to attend
Unemployment amongst young people across a number of European countries is very high. Imagine that European Union ministers proposed a youth employment subsidy designed to help increase the number of
The government decides to reduce air pollution by reducing the use of petrol. It imposes €0.50 tax for each litre of petrol sold.a. Should it impose this tax on petrol companies or motorists?
If the government places a €1,000 tax on luxury cars, will the price paid by consumers rise by more than €1,000, less than €1,000 or exactly €1,000. Explain.
per cent of the price per unit? Use diagrams to help support your answer to the question.
and 25.Which do you think leads to a fairer market outcome:a specific tax on every unit of alcohol sold or an ad valorem tax on the price of alcohol equal to
A government wants to reduce the incidence of antisocial behaviour which can result from excess alcohol consumption by young people aged between
A country’s finance minister wants to raise tax revenue to help reduce government borrowing. Advise the minister what type of goods s/he should consider levying a tax on to accomplish the
Suppose that, in the absence of any tax whatsoever, the equilibrium price of a flat is €150,000. Now suppose that the government requires buyers in the housing market to pay a tax of €5,000 on
A recent study found that the demand and supply schedules for frisbees are as follows:What are the equilibrium price and quantity of frisbees?a. Frisbee manufacturers persuade the government that
The government has decided that the free market price of tobacco is too low.a. Suppose the government imposes a binding price floor in the tobacco market. Use a supply and demand diagram to show the
Lovers of opera persuade the government to impose a price ceiling of €50 per ticket at the country’s national opera house. Does this policy get more or fewer people to attend? What does the
How might an economist decide whether the benefits of a subsidy outweigh the cost?
What determines how the burden of a tax or a subsidy is divided between buyers and sellers? Why?
How does a subsidy on a good affect the price paid by buyers, the price received by sellers and the quantity bought and sold?
How does a tax imposed on a good with a high price elasticity of demand affect the market equilibrium? Who bears most of the burden of the tax in this instance?
Explain why economists usually oppose rent controls.
What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?
What potential costs and benefits might a government have to consider in deciding whether to impose a price floor or a price ceiling?
Under what circumstances is a price ceiling and a price floor referred to as binding?
Which causes a shortage of a good – a price ceiling or a price floor? Which causes a surplus?
Give an example of a price ceiling and an example of a price floor.
Suppose a technological advance reduces the cost of making tablet devices.a. Use a supply and demand diagram to show what happens to price, quantity, consumer surplus and producer surplus in the
Four consumers are willing to pay the following amounts for haircuts:Hans: Juan: Peter: Marcel:€7 €2 €8 €5 There are four haircutting businesses with the following costs:Firm A: Firm B: Firm
The cost of producing smart phones has fallen over the past few years. Let’s consider some implications of this fact.a. Use a supply-and-demand diagram to show the effect of falling production
Why might we want to think about market price as the outcome of a bargaining model?
is the seller.a. Use Mario’s supply schedule and Günter’s demand schedule to find the quantity supplied and quantity demanded at prices of €2, €4 and €6. Which of these prices brings
is the buyer and Mario from Problem
Consider a market in which Günter from Problem
Mario owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to
It is a hot day, and Günter is thirsty. Here is the value he places on a bottle of water:Value of first bottle €7 Value of second bottle €5 Value of third bottle €3 Value of fourth bottle
Suppose the demand for French bread rises. What happens to producer surplus in the market for French bread? What happens to producer surplus in the market for flour? Illustrate your answer with
An early freeze in Normandy ruins half of the apple harvest. What happens to consumer surplus in the market for apples? What happens to consumer surplus in the market for cider? Illustrate your
How would you define the concept of welfare? If wellbeing is about happiness and satisfaction with life, how would you, as an economist, go about trying to define and quantify happiness and
Explain how charging a higher price for tickets for the Wimbledon tennis championships would not only get rid of queues but also would be a more efficient market allocation. Would this also be an
Why are issues relating to efficiency classed as positive? What are the normative issues we might want to be concerned with?
What is meant by a Pareto efficient outcome?
Using the supply-and-demand diagram you drew for Question 5, assume that the demand shifts to the right as a result of an increase in incomes. On the diagram, show how consumer surplus and producer
What is efficiency and how might we measure it?
Prepare a supply-and-demand diagram, showing producer and consumer surplus in the market equilibrium.
Explain how sellers’ costs, producer surplus and the supply curve are related.
Explain how buyers’ willingness to pay, consumer surplus and the demand curve are related.
What is welfare economics?
What is meant by the term ‘allocative efficiency’?
Suppose the book-printing industry is competitive and begins in long-run equilibrium.a. Draw a diagram describing the typical firm in the industry.b. Hi-Tech Printing Company invents a new process
‘High prices traditionally cause expansion in an industry, eventually bringing an end to high prices and manufacturers’ prosperity.’ Explain, using appropriate diagrams.
Consider total cost and total revenue given in the table below:Quantity 0 1 2 3 4 5 6 7 Total cost €8 19 110 111 113 119 127 137 Total revenue €0 8 16 24 32 40 48 56a. Calculate profit for each
Alejandro’s lawn-mowing service is a profit-maximizing, competitive firm. Alejandro mows lawns for €27 each.His total cost each day is €280, of which €30 is a fixed cost. He mows 10 lawns a
You go out to the best restaurant in town and order a steak tartar dinner for €40. After eating half of the steak tartar, you realize that you are quite full. Your date wants you to finish your
Your flatmate’s long hours in the chemistry lab finally paid off – she discovered a secret formula that lets people do an hour’s worth of studying in 5 minutes.So far, she’s sold 200 doses,
What are the characteristics of a competitive market?Which of the following drinks do you think is best described by these characteristics? Why aren’t the others?a. tap waterb. bottled waterc.
Your cousin Vinnie owns a painting company with fixed costs of €200 and the following schedule for variable costs:Quantity of houses painted per month 1 2 3 5 6 7 Variable costs €10 €20 €40
Your aunt announces that she is thinking about opening a restaurant. She estimates that it would cost €500,000 per year to rent the premises, buy a licence to serve alcohol and to buy in food. In
Manton Bakery is a company that bakes bread. Here is the relationship between the number of workers at the bakery and Manton’s output in a given day:Workers Output of loaves Marginal product
Are market supply curves typically more elastic in the short run or in the long run? Explain.
Explain the difference between increasing, constant and decreasing returns to scale.
Does a firm’s price equal marginal cost and the minimum of average total cost in the short run, in the long run, or both? Explain.
Under what conditions will a firm exit a market? Explain.
Under what conditions will a firm shut down temporarily?Explain.
Draw the marginal cost and average total cost curves for a typical firm. Explain why the curves have the shapes that they do and why they cross where they do.
Draw the cost curves for a typical firm. For a given price, explain how the firm chooses the level of output that maximizes profit.
Give an example of an opportunity cost that an accountant might not count as a cost. Why would the accountant ignore this cost?
Draw a production function that exhibits diminishing marginal product of labour. Draw the associated total cost curve. (In both cases, be sure to label the axes.) Explain the shapes of the two curves
What is marginal product, and what does it mean if it is diminishing?
per cent?What would your choice be in a?What would your choice be in b?What is the difference between these two sets of statements and how do they illustrate the concept of framing?
per cent but the chance of losing €200 rated also at
per cent chance of winning €100?b. Would you prefer a decision that guarantees a €100 loss or would you rather take a gamble where the chance of winning €50 was rated at
per cent chance of winning €150 or a
Look at the following two statements:a. Which would you prefer – a
Choose three products you purchased recently. Think about the reasons that you made the particular purchase decision in each case. To what extent do you think you made the purchase decision in each
Sketch a diagram to show the effect on demand of a change in income on a good which has an income elastic demand.
Using an example, explain why the consumer optimum occurs where the ratio of the prices of two goods is equal to the marginal rate of substitution.
Indifference curves are concave to the origin (i.e. they bow outwards). Using your knowledge of the properties of indifference curves, explain why indifference curves cannot be convex to the origin
A consumer has an income of €30,000 a year and divides this income between buying food and spending on leisure. The average price of a unit of food is €15 and the average price of a unit of
Economist George Stigler once wrote that, according to consumer theory, ‘if consumers do not buy less of a commodity when their incomes rise, they will surely buy less when the price of the
per cent as well. Draw Surette’s new budget constraint.How would Surette’s optimal combination of orange juice and yoghurt in 2015 compare to her optimal combination in 2014?
per cent in 2015 and that Surette’s salary increases by
Surette buys only orange juice and yoghurt.a. In 2014, Surette earns €20,000, orange juice is priced at €2 a carton and yoghurt is priced at €4 a tub. Draw Surette’s budget constraint.b. Now
Compare the following two pairs of goods:a. Coke and Pepsib. skis and ski bindings.In which case do you expect the indifference curves to be fairly straight, and in which case do you expect the
Jacqueline divides her income between coffee and croissants (both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in France.a. Show how this early
What are heuristics and how might they affect consumer decision making?
Explain why the assumptions of the standard economic model might not hold.
Can an increase in the price of cheese possibly induce a consumer to buy more cheese? Explain.
The price of cheese rises from €6 to €10 a kilo, while the price of wine remains at €3 a glass. For a consumer with a constant income of €3,000, show what happens to consumption of wine and

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