1. Suppose the cost of energy falls, what effect will this have on supply in a product

market like furniture which uses energy to manufacture furniture? In other words,

will it increase or decrease supply for furniture? Draw a supply and demand graph

of the furniture market showing the supply shift and indicate what will happen to

price and quantity.

2. Prescription drugs are expensive. Some advocacy groups say prescription drugs

should have government set prices. Would the government impose a price ceiling

or price floor? Indicate with a graph the likely result. Does this create a shortage

or a surplus?

3. Draw a perfectly price elastic demand line. Then draw a supply increase in the

same graph. Which was affected more, price or quantity?

4. If a good is price elastic of demand, does it tend to have a lot of substitutes or a

few? Is it more likely a luxury or a necessity? Suppose a tax is placed on a

luxury. Will it raise a lot of taxes? Why or why not?

5. Taxes are put on cigarette producers. Is the demand for cigarettes price elastic or

price inelastic? Draw the demand curve and the effect of taxes on the suppliers.

Who bears most of the burden of the tax, the producers or the consumers of

cigarettes?

6. Suppose hospitals are given new subsidies from the government. Suppose also

that most visits to a hospital are done out of necessity, so the demand is price

inelastic. Draw the inelastic demand for hospital services. What effect will the

new subsidies have on supply of hospital services? Include this effect on supply

in your graph. Based on your graph who receives most of the benefits of the

subsidy, the hospital, or the patients?