PROBLEM SET MICROECONOMICS
NAME: _________________________________ PROBLEM
SET 2
1. A new plan before
Congress to combat obesity has recommended instituting a national tax on fast
food. The demand for such food is
thought to be elastic (but not perfectly elastic).
a. Show the market
for fast food before any such tax is put in place. Identify the producer and consumer surpluses
as well as the equilibrium price and quantity (you do not need to calculate
these, just show them in your graph).
b. Show a new graph
indicating how this tax would change the market. Identify which curve shifts, what happens to
the price the buyer pays and the price the seller receives. Additionally, what happens to consumer and
producer surpluses, do they go up, down, or stay the same? (see below)
c. Who would bear the
larger portion of the burden of the tax?
Why?
d. If the original
market price prior to the tax was $2 and the quantity was 500 and after the tax
the price the buyer pays is $2.50, the price the seller receives is $1.50, and
the quantity is 400, what is the size of the dead weight loss?
a.
PART b.
Which curve shifts: _________________________________
Price Buyer Pays (up, down, same): ____________________
Price Seller Receives (up, down, same): ____________________
Consumer Surplus (up, down, same): ____________________
Producer Surplus (up, down, same): ____________________
c.
__________________________________________________________________________
d._________________________________
2. Pollution is
considered by most a negative externality.
Some economists would like to see the costs of these burdens
incorporated into the price of goods that we buy. For instance, since coal fire power plants
increase emissions that could potentially lead to climate change, these economists
believe that the price we pay for electricity is not adequately high
enough. Draw a completely labeled graph
and illustrate on the graph how much higher electricity prices would be if the
full costs of electricity production were taken into account. You do not need to provide actual numbers,
rather show on the price axis where the price would be before the externality
is considered and the price after the externality is included. What problems might exist in determining this
new, externality based, price?
3. Data for the
market for graham crackers is shown below.
Calculate the elasticity of demand between the following prices.
Price of crackers
Quantity Demanded (per month)
Quantity Supplied (per month)
$3
80
120
$2.5
120
140
$2
160
160
$1.5
200
180
$1
240
200
$1.00 - $1.50: ___________________________________
$1.50 - $2.00: ___________________________________
$2.00 - $2.50: ___________________________________
$2.50 - $3.00: ___________________________________
If the price of graham crackers is $2.50 should firms raise
or lower their prices if they want to increase revenue? Explain this in terms of elasticity.
4. The following
table presents data for wages in the market for internet security
professionals.
Wage
Quantity Demanded
Quantity Supplied
$50,000
20,000
14,000
$60,000
18,000
18,000
$70,000
16,000
22,000
$80,000
14,000
26,000
$90,000
12,000
30,000
What is the equilibrium wage?
___________________________________
Due to an increase in the internet security threats, the
government wants to apply a price control in this market to encourage more
people to become internet security professionals. Assume that a wage control is set at $75,000. Will this increase the number of people
entering this labor market? Why or why
not? If you answered no, at what wage
would you set the price control? What is
the consequence of doing this?
5. In the old days
lighthouses were built along the coast to prevent ships from running aground on
rocks in unfamiliar ports. By shining a
beam of light over a port and guiding ships away from rocks, these vital
buildings reduced the risk for ship captains and were generally considered to
be extremely valuable resources.
Curiously, lighthouses were almost always run and maintained by local
governments.
Based on what you have learned this week explain in economic
terms why private firms would not run a lighthouse?
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