Reference no: EM132172229

Part I: Yes/No-Questions

1. The law of demand simply states that the lower the price of a product, the less amount that consumers are willing to buy.

2. The availability of substitutes affects the slope of the demand curve.

3. Generally, a change in the price of a good cause a movement along a demand curve, while a change in any other factor besides the price the good causes a shift of the demand curve.

4. An increase in the price of lamb will shift out the demand curve for steak.

5. An increase in wages paid to coal miners will shift out the supply curve for coal.

6. The imposition of a $5 per ton tax on coal will shift out the supply curve for coal.

7. Economic tax incidence depends on the relative slopes of the supply and demand curves. Specifically, the greater share of the economic tax incidence falls on the more inelastic party.

8. The price elasticity of demand, ε, means a 10% increase in price leads to an ε% change in quantity demanded.

9. Rent control policy in low-income housing markets usually results in a shortage of apartment housing, as suppliers will withdraw apartments from production, while consumers are demanding more.

10."I care very little about what knowledge I learn, but nice grade is important." This type of preference could be illustrated by the following graph A.

Part II: Understanding A Price Floor Policy

Governments commonly uses price floors. One of the most classic examples of a price floor is a minimum wage policy in a labor market. Minimum wages laws date from 1894 in New Zealand, 1909 in the United Kingdom, and 1912 in Massachusetts. Minimum wage policies, however, often create unintended consequences. The original 1938 U.S. minimum wage law, for example, caused massive unemployment in Puerto Rico.

Suppose the following demand and supply curves describe the labor market in Puerto Rico before 1938:

Demand: P = 20 - Q

Supply: P = 2 + 0.5Q

where P is the wage per hour, and Q represents the number of workers hired, in thousands (e.g. Q = 1 means that 1,000 workers have been hired).

a) Calculate the equilibrium wage and the number of workers hired before the 1938 minimum wage laws. Illustrate on a graph.

b) The 1938 U.S. minimum wage laws artificially required that all workers earned at least $10 per hour in Puerto Rico. So, how many workers would be employed under the minimum wage policy? Illustrate on a graph.

c) Using your graphs from (a), calculate the consumer surplus and producer surplus at the initial equilibrium price and quantity from part (a).

d) Calculate the new consumer surplus and producer surplus with the minimum wage of $10 (part b).

e) How does the total consumer and producer surplus in part (c) compare to the total consumer and producer surplus in part (d)? What explains the difference in these two figures? Please explain intuitively.

Part III: Understand Tax Analysis

The following demand and supply curves describe the market for cameras in Japan, assuming that the market is perfectly competitive.

Supply: P = 40 + Q

Demand: P = 240 -3Q.

a) What will the equilibrium price and quantity of cameras be?

b) Calculate the producer and consumer surplus associated with the equilibrium found in part (a). Illustrate on a graph.

c) Suppose the government levies a tax of $10 per camera sold and imposes the legal tax incidence on producers. What is the new quantity of cameras sold? What price do consumers pay? What price do producers receive? Illustrate on a graph.

d) Find the new producer and consumer surplus associated with your answer to part (c).

e) How much revenue does the government raise from the tax?