A political leader comes to you and wonders whom she will get the most complaints if she institutes a price ceiling when demand is inelastic and supply is elastic. A)How do you respond? Assuming the price ceiling was set at below the equilibrium price, a new equilibrium would occur where the amount of goods supplied would be less than the amount of goods originally demanded. Producers or suppliers in this case would complain the most since the price ceiling would result in a decrease in overall producer surplus. In addition, there might also be complaints from consumers if they are not able to access the good.
I’m assuming here that an inelastic demand curve indicates the good may be a necessity with limited substitutes. In some cases (depending on the good), a lack market could arise, where those with money or connections are able to purchase the good at a higher price. In this case, the suppliers might take in more money and poorer people would be hurt the most (with subsequent complaints). B)Demonstrate why your answer is correct. At the price ceiling imposed, sellers will only be willing to produce a certain quantity (Sq), which is much less than the quantity demanded (Sq) at that price.
This is a shortage (Sq – Sq) that will cause complaints by both the buyers and sellers. Life consider the original producer surplus (triangle *CE), we see that it will decrease after the ceiling is imposed to triangle FED. If we consider the original consumer surplus (CAP*), it is ambiguous whether the new consumer surplus will be higher or lower (ABED). The producers would be unhappy with this change due to the decrease and a subset of the buyers would likely be unhappy as well (depending on how the good is distributed). 5. Consider the market for hiking boots.
This market can be represented by the following supply and demand equations: Q = 800 – IPPP (demand) and Q –50+1 pop (supply) a)Graph the supply and demand curves, labeling the axes clearly. Calculate the equilibrium price and quantity in this market (Q represents a pair of boots), and label these points on the graph. Equilibrium price is $1. 70 and equilibrium quantity is 120 pairs of boots. B)Calculate consumer surplus, producer surplus, and social welfare in the market for hiking shoes. CSS = 18 = 72 TTS = social welfare = CSS + AS = 90 c)Now suppose that a tax of 50 cents is imposed on each pair of boots.
With the tax of 50 cents, find the price that consumers pay, the price that firms receive, and the quantity exchanged. After the tax of 50 cents, consumers will pay a new price of $1. 80 for a pair of tots, sellers will receive a price Of $1. 30, and the quantity exchanged will lower from 120 pairs of boots to 80 pairs of boots. D)Calculate the total tax revenues. How much of the tax incidence falls on consumers? And how much of the tax incidence falls on producers? Total tax revenues = Q * tax rate = 80 0. 5 $40 To calculate the tax incidence, find the difference between the old equilibrium price and the after tax price.
In this case, the consumers pay $0. 10 (or 20% of the tax – $8 total) and the producers pay $0. 40 (or 80% of the tax- $32 total). E)Calculate consumer surplus, producer surplus, and the level of social elf associated with the tax. CSS = 1/2*((80)*(2-1. 8)) = $32 TTS = social welfare = CSS + AS + tax revenues = $40 + $40 $80 f)Calculate the deadweight loss associated with the tax. DWELL = TTS (pre tax) – TTS (post tax) = $10 Consider the market for hiking boots. This market can be represented by the following supply and demand equations: Q = 800 – IPPP (demand) and Q = 50 + 1 pop (supply) market for hiking shoes.
CSS = boots, sellers will receive a price of $1. 30, and the quantity exchanged will lower from 120 pairs of boots to 80 pairs of boots. D)Calculate the total tax = 80 *0. 5 = $40 rice and the after tax price. In this case, the consumers pay SO. 10 (or 20% of welfare associated with the tax. CSS 1/2*((80)*(2-1 8)) 2)alienated whether each of the following activities is associated with a positive externalities, a negative externalities, or neither. Briefly explain your answers. A)Someone at your table is chewing with his or her mouth open. It will depend, but I’ll say this may constitute a negative externalities.
If the people around are caused some type Of harm/annoyance by the person’s behavior, it would be considered a negative externalities. B)Going to graduate school in environmental management. Neither – there’s the potential for positive externalities to come out of the education if you work on public issues after you graduate, but there isn’t anything inherent in the pursues of the degree that would make it either a positive or negative externalities. C) Someone comes unprepared to a study group. Negative externalities as the individual is imposing a cost, either in time or stress/annoyance on the others without doing anything themselves.
They would end up benefiting from the activity without paying the cost. D)Someone is scalping tickets to the US Open at a ridiculously high price. Neither. This could indicate a shortage of tickets, but if people are willing to pay the price, it’s up to them. E) Someone asks a really good question in class. Positive. Everyone benefits from the question and answer, including the person that asked the question. F)The European union signing the Kyoto Protocol. Possibly positive, if it influences other bodies to sign on and the E actually follows through on whatever their commitments are. G)Drivingly car.
Negative due to the emissions associated with driving a car (assuming they aren’t paid for in some way). 3)Len class, we showed that for goods associated with a negative production externalities, the efficient quantity of exchange is lower than that which is determined by the market. Demonstrate graphically that the opposite holds with a positive externalities. In other words, show graphically that for goods associated with a positive externalities (assume a production externalities), the efficient quantity of exchange is higher than that which is determined by the market. Carefully label your graph with all parts necessary to make your case.
In the case of a positive production externalities, the marginal social cost of the production is not taken into count to compensate producers. In this case, the original supply curve (MS) and demand curve (MATT) meet at equilibrium point A (given a price of P* and quantity demanded of Q*). When the marginal social cost is taken into account (curve MS), it can be seen that the new equilibrium would be reached at point B (at a price and a quantity Q’). This would allow a net increase in welfare (equivalent to DID_ in the graph) and the quantity demanded would be higher than the original market (ii. Q’ ; Q*). )The daily market for gasoline is characterized by the demand curve Q = 10 – P and he perfectly elastic supply curve P 2, where Q millions of gallons per day and P = price/gallon. The burning of gasoline generates pollution and creates an externalities. Economists estimate the externalities to be 52 per gallon. A. Construct a graph that includes the demand curve, the supply curve, and the social marginal cost (SCM) curve. Basing no government policies, solve for the equilibrium quantity and the efficient quantity. Label them both on your graph. Equilibrium quantity is where S meets D, at quantity 8.
Efficient quantity is where SCM meets D, at quantity 6. C. N your graph indicate the deadweight loss (DWELL) that will arise without government intervention. DID- occurs when social cost is not taken into account and is indicated by the colored triangle below. (DWELL = h (2*2) = 2) d. Suppose a Poignant tax is proposed to correct the market failure. How much should the tax be per gallon? The tax should be set at $2 per gallon (equivalent to the social costs of the externalities). E. Calculate the tax revenue that the Poignant tax would generate. Label it on the graph.
The revenue generated would equal the tax multiplied by the quantity consumed per day. It would equal x 2 = f. With the tax in place, calculate total surplus (T S). Label it on the graph. Total surplus = Consumer surplus + producer surplus + tax generated – pollution cost Consumer surplus = area below the demand curve at the given price Producer surplus = O (receiving the same amount as marginal cost) tax generated = tax rate ;k quantity (=12) pollution cost pollution cost * quantity (-?12) so, TTS = CSS 1/2 (6*6) = 18 g. What, if any, are the remaining pollution costs to society?
The costs associated with the pollution (per unit pollution cost of $2 multiplied by the annuity) were offset by the tax instituted. Total pollution costs were $1 which were offset by an equivalent tax of 1. The daily market for dry-erase markers on campus is characterized by the following inverse demand and supply curves Inverse demand: p 5 – Q Inverse supply: P = 3 a. Sketch the graph of the demand and supply curves. B. Solve for the equilibrium price and quantity, label it on the graph. P Q = 2, P = $3 (Assume dollars) c. Solve for consumer surplus, producer surplus, and total surplus, labeling all on the graph as appropriate.
CSS = h (2*2) AS O (receiving same price as marginal cost) TTS=CSS + AS d. Now assume that the “off-gassing’ of each marker creates a negative health externalities. But it is not known how to value the marginal external cost per marker. What is the minimum external cost per marker that would imply zero markers is the efficient quantity? If we’re assuming zero markers are the efficient quantity, then the minimum external cost required would be the difference between the original cost at quantity O and the cost along the demand curve for that quantity. E. Min external cost = P(5) – P* 5-3 =$2 per marker (assumed dollars) assuming your answer to part d is correct, solve for the deadweight loss of tot regulating the market for dry-erase markers on campus, and label it on the graph. DWELL = h (2*2) -2 f. L’s your answer to part e also equal to the total costs of pollution in the unregulated market? Briefly explain. If we’re assuming, as above, that the cost of health pollution is equal to $2, then the answer to part E does not equal the total costs associated with pollution in an unregulated market.
Those costs would equal the pollution cost multiplied by the equilibrium quantity (ii. 2*$2 $4). G. Would your answer to part e change if the marginal external costs were even greater? Briefly explain. Yes, if the marginal external costs were greater than the total area for the DWELL would also increase, as per the diagram below. 2. TRUE / FALSE / UNCERTAIN For these questions, you must argue your case (roughly 3 to 5 sentences) and make any assumptions necessary to compose your answer, including graphs if helpful. Points depend entirely on the quality of your explanation. . When listening to a good song on the radio, there is no opportunity cost because it is free. False – The opportunity cost will be the value of the next best alternative to whatever you’ve chosen. In this case, the cost might be not listening to another good song on the radio. It doesn’t matter whether listening to the radio is free, as the cost might be in the form of something else -? such as time in this case tie. You can’t listen to both songs at the same time and may only have limited amount of time to listen to one song). B. Taxes always reduce economic efficiency.
False – taxes do not always reduce economic efficiency. Taxes can be used to shift towards greater efficiency when they target negative externalities (egg. A tax on carbon), especially when they’re used to offset other types of taxes such as income taxes). C. Microeconomic theory implies that both population growth and rising per capita income in China will result in greater demand for automobiles in China. Probably true – If we assume that cars are a normal good, then microeconomic theory would indicate that rising income levels would increase the demand in China.
It’s uncertain how the demand would change given the population growth occurring at the same time, and the greater pollutants associated with the greater demand for cars. Its possible, though unlikely, that over time, other transportation options would be plopped that would balance the need to travel greater distances with lower pollution profiles and higher densities (egg. High speed electric trains). So while it’s likely that the demand for cars would be greater, the effects of population and pollution might overtake the effects of rising income which could result in competing alternative technologies (hence the answer of probably true). . With a Poignant tax, tax revenue always equal the costs of pollution at the efficient condition. False – tax revenue is a function of the tax rate and the number of units produced. If the marginal cost of pollution increases at a rater rate than the marginal cost of production, the tax revenues generated will not necessarily account for the total costs of all pollution. In this case, tax revenues at the efficient condition would equal the area of ABACA, while pollution costs would be the area CEDE (ii. The difference between the social marginal cost and the marginal cost for the efficient quantity).
It’s not clear whether these two areas are equal. E. Whenever there is a consumption externalities, equilibrium consumption will be inefficiently high. False – it depends on whether the externalities is positive or negative. A negative externally will tend to overproduce (ii. Equilibrium consumption will be inefficiently high) while a positive externalities will tend to under-produce, with equilibrium consumption being inefficiently low. 3. Briefly describe the free rider problem in your own words using an example of a public good.
The free rider problem arises when someone is able to receive the benefits of a good without actually paying for them. If we take the case of a public good, such as national defense, we see it is both non-calculable (ii. A country will not exclude me from being defended in some way when live there) and is also on-rival in consumption (ii. If I am defended, it’s also very likely that the people around me will be as well). However, I do not have to actually contribute to national defense in order to reap the benefits. As such, I could be considered a free-rider. . A neighborhood that consists of 100 individuals is trying to construct a communal flag pole, which will be a public good. They are trying to decide how high of a pole to construct. The price per foot of the pole is P = $10, and each individual has his/her own demand curve Q = 10 – P, which is the same for all individuals, and Q is the height measured in feet. What is the efficient height of the flag pole? Would you expect the individuals to voluntarily provide a flag pole at the efficient height? Briefly explain why or why not.
For public goods, we can determine the efficient quantity by vertically summing all the individual demand curves. Assume P = 10 – Q for each person For 100 people, SMB= 100(1 0-Q) 1000 – QUOI tap=10, SQ = 1000 – 10 Q = 9. 9 ftp wouldn’t expect the individuals to voluntarily provide a flag pole at the efficient height. As this is the case off public good, each individual has little incentive to provide for the flag pole as they can enjoy the benefits when there people pay (ii. There’s a positive externalities enjoyed by all).
In fact, we can see from the original individual demand equation (Q = 10 – P), that at a price point p = $10, the equilibrium quantity for each individual is actually O. It is only when aggregate demand/benefits are taken into account do we see the efficient pole height. Suppose you are given the following supply curve: Q = 2 + UP. What is the price elasticity of supply for a price change from P = 4 to P = 5 (Use the midpoint formula)? Is supply elastic, inelastic, or unit elastic over this range? At P = 4, Q = 10. At P = 5, Q = 12 Elasticity = acts-SQL )/;2+sq)] / [(pa-pa +0. 81 Price elasticity of supply is inelastic (Sees <l) 2.
Explain why the equilibrium provision of a good that is both non-rival and non-excluding is suspect-table to the free rider problem. Explain why this is a problem. If a good is non-calculable, it means a person cannot be stopped from benefiting from that good. If a good is non;rival, it means that a person’s use of that good does not diminish the use of that good for other people. If a good is both non-calculable and non-rival, it can be susceptible to he free rider problem, where people are able to obtain benefits from a good without feeling the need to pay for them (as they can’t be excluded from using it).
This becomes a problem because it then becomes difficult to maintain the upkeep potholes types of goods as the total level of voluntary provision for the goods will be inefficiently low. If we consider public goods to be the outcome of a positive externalities (where social marginal benefit is greater than individual marginal benefit), people will be able to receive more benefits than they are actually willing to pay for, which would mean the good old be under-supplied. As the good is also Nan-calculable, people would take advantage and be free riders’ of the good. . Describe a good that IS both rival and non-calculable, and explain whether (and why) you believe it is susceptible to the “Tragedy of the Commons. ” Fisheries are an example of a good that could be considered rival and non-calculable. It would be difficult to effectively monitor and enforce certain fishing standards across the world (ii. The global fishing stock is non-calculable) but when certain fish (egg. Blue- fin tuna) are fished by one person, other people are not able to obtain the amen benefit due to stock depletion (ii. It is a rival good).
This type of good would be susceptible to the “Tragedy of the Commons”, as people would believe they should catch the fish before someone else does. This would result in the fish being depleted at a higher rate than they can re-produce, resulting in an exploitation of the resource. 4. British Petroleum (BP) and Exxon-Mobile (ME) are both considering whether to increase their spend-inning on advertising to improve their “green” image. They each know their payoffs depend on what the other does. Payoffs are given in the matrix below. A.
Identify the Nash equilibrium, clearly stating the equilibrium strategy of both BP and ME. BP Raise Speediness’s the same Raise spending BP: $2 million MI $3 million BP: $3 million MI $4 million Stay the same MI $2 million BP: $4 million ME: $3 million Exxon Mobil From the perspective of BP: -If Exxon raises spending, BP will stay the same -If Exxon stays the same, BP will stay the same From the perspective of Exxon: -If BP raises spending, Exxon will raise spending -If BP stays the same, Exxon will raise spending Nash Equilibrium where BP will stay the same, and Exxon will raise spending. B.
