Reference no: EM133038485

Please answer the following questions:

1. The US government administers two programs that affect the market for cigarettes. Media campaigns and warning labels are aimed at making the public aware of the health dangers of cigarettes. At the same time, the Department of Agriculture maintains a price support (or floor) for raw tobacco which is above its market price.  Do these two programs complement each other or work against each other with respect to the goal of reducing cigarette consumption?  As part of your answer, illustrate graphically the effects of both policies on the market for cigarettes.

2. Over the last 10 years the price of a cell phone has declined dramatically.   At the same time, taste and preferences for cell phones has increased substantially.  Using a supply and demand diagram of the market for cell phones, explain what likely caused this outcome.

3. Consider the markets for domestic and imported cars. Use 2 diagrams, one which illustrates the market for imports and one which illustrates the market for domestic cars to answer the following questions.

3a) Starting from an initial equilibrium in both the domestic car market and the market for imports, what will be the effect on prices and quantities if the U.S. imposes a tariff on imported cars?

3b) How does the tariff affect the revenue of domestic car producers?  How does it affect the revenue of imported car producers?

3c) Consider three groups:  Domestic car producers, foreign producers and U.S. consumers.   How does the imposition of the tariff affect the welfare of each of these three groups?

4. Suppose the supply and demand curves for natural gas are given by the following equations:

= 34 - 1.8P

= 18 + 0.7P,

where Q denotes the quantity of natural gas in thousands of cubic feet and P denotes the price of gas per thousand cubic feet.

4a) Find the equilibrium price and quantity of natural gas.   Illustrate your answer using a supply and demand diagram.

4b) Now suppose that the government regulated the market for natural gas and set the regulated price of gas at $4 per thousand cubic feet.  Illustrate the impact of the regulated price on the market for natural gas.  How much gas is demanded under the regulated price?  How much gas is supplied?  Is there an excess demand or excess supply of gas?  How large is the excess demand or supply?

5) The Department of Housing and Urban Development (HUD) has used housing subsidies as one of its principal tools for guaranteeing adequate housing for low-income families.  The equilibrium amount of low-cost housing units (without any subsidy) is estimated to be 10 million in 2003.  An economist at HUD estimates that a 20 percent drop in the price of housing will stimulate an increase in demand for low-cost housing to 11.45 million units.

5a) Calculate the price elasticity for low-cost housing.   Interpret this number for a non-economist.

5b) The President has set a target of increasing low-cost housing consumption by 35 percent (compared to 10 million).  What percent drop in price is required to meet this goal?

6) Ruben's sells fish tacos and other lunchtime food near university campuses. Currently, the price of a Bottom Feeder Taco is $1.40 and daily sales at the YSU campus store is 55 tacos. A price increase to $1.80 reduces daily sales to 45 tacos.

6a) What is the effect of the price increase on revenue at the YSU campus store?

6b) Calculate the price elasticity of demand for Bottom Feeder Tacos using the mid-point formula.

6c) Another Ruben's store is located on the ZSU campus. The students/customers from ZSU are nearly identical to those from YSU, but their income is 15% higher. When Bottom Feeder Tacos are priced at $1.80, daily sales at the ZSU store are 51 tacos. Are Bottom Feeder Tacos a normal good? Calculate the income elasticity of demand for Bottom Feeder Tacos using the mid-point formula.

7. Consider the following demand and supply equations for beer:

Q^D= 140 - 2P

Q^S= 20 + P

7a) Find the equilibrium price and quantity of beer.

7b) What is the price elasticity of demand in equilibrium?

Now suppose the price of barley, an input in beer production, falls and hence the supply of beer shifts to:

Q^S = 30 + P

7c) What is the new equilibrium price and quantity of beer?

7d) What is the price elasticity of demand at this equilibrium?

7e) In which equilibrium, 7a or 7c, is demand relatively more elastic?