PROBLEM SET MICROECONOMICS

/in /by

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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