Part I (60 points): Please briefly explain your responses.

1. Russia has experienced the worst drought in 50 years causing significantly reduced harvests and a dramatic rise in the prices of key foods. According to Bloomberg news they are considering setting price ceilings for 24 staple food items. (http://www.bloomberg.com/news/2010-09-14/russia-may-set-price-ceiling-for-staple-foods-as-drought-fuels-inflation.htmll) Do you see any problem with their strategy? Include a demand & supply sketch in your answer.

2. Why should you care about the elasticity of demand and elasticity of supply for a good you are considering subsidizing? Include a demand and supply sketch in your explanation.

3. Do you consider Yosemite National Park a public good (or near public good)? Why or why not?

4. Pumpkins have been found to be high in nutrients that help in fighting diseases such as cancer, vision problems including cataracts, heart disease, Alzheimer's disease, obesity, skin damage, high blood pressure, and stress. (http://www.suite101.com/content/health-benefits-of-pumpkin-a153140) Suppose the Pumpkin Growers Association argues that since pumpkins clearly provides significant positive externalities your government agency should provide subsidies for pumpkin growers.Please respond to their argument for funds from your budget.

5. What is a shadow price and why might you use a shadow price?

6. What's the difference between a social insurance program and an income redistribution program? Please give an example of each and explain how the justifications differ.