Reference no: EM13798481

Question 1: Federal law requires that packs of cigarettes carry warnings to consumers about the negative health effects (such as lung cancer) of cigarette smoking. At the same time, the U.S. Department of Agriculture (DOA) maintains a program of price supports (i.e., a price floor) for tobacco (which is, of course, an input into the production of cigarettes and therefore affects the cost of production of cigarettes).

Under this program, the supported price is above the market equilibrium price and the government purchases that part of the tobacco crop that is not bought in the private market at the supported price.

According to the U.S. Surgeon General, a central goal of federal public health policy is to reduce the national consumption of cigarettes.

Is there a conflict between the cigarette pack labeling law and the DOA price support program for tobacco with respect to this goal, or do the labeling law and the support program work together to reduce cigarette consumption?

Explain your answer fully yet succinctly, and illustrate by using graphs to show the effects, if any, of the labeling law and the price floor on both the tobacco and cigarette markets. (You should assume the following: a) tobacco and cigarettes are produced in purely competitive markets by tobacco farmers and cigarette firms, respectively; b) tobacco farmers do not make cigarettes, and cigarette firms do not grow tobacoo; and c) neither market demand nor the market supply curve is vertical or horizontal.)

Question 2: The U.S. federal minimum wage rate is currently $7.25 par hour. The Fair minimum wage act (a bill submitted to the U.S. congress)would increase the minimum wage rate to $10.10 per hour oveer three years and then adjust the rate annually for inflation.

Assume that the market for teenage labor(i.e., workers age 16- 19) can be considered separately from other labor markets and that
this market is currently in equilibrium at an hourly wage of $7.25 and an employment level of Ly

a) Depict graphically the likely impact of an increase in the minimum wage rate to $/0.10 on each of the following: wage rate level of employment, and extent of unemployment, if any. (Use LP and La respectively, for the quantities demanded and supplied of labor.)

b) Suppose that one of the goals of raising the minimum wage rate to $10.10 is to increase the total wage income of all teenagers who are employed at the minimum wage rate (i.e., the wage income eof employed teenagers considered as a whole). What additional piec of information about the demand for labor must be known to determine if the proposal will achieve such an increase? Explain briefly. (For purposes of this question, assume that all employed teenage workers are covered by the minimum wage law.)

c) Now suppose that the market for teenage labor consists of two segments: a covered segment, in which workers are subject to the minimum wage law, and an uncovered segment, to which the law does not apply (due, for example, to the small size of firms in this lat¬ter segment). Assume that each segment is initially in equilibrium at a wage rate of $7.25 per hour and a level of employment of Lo.

i) Using two labor market graphs (one for each segment),

show the impact of the new minimum wage rate on for each segment(bear in mind that the minimum wage rate only applies to the covered sector). (You can assume that firms in the covered sector cannot hire from the uncovered sector, but that workers are free to shift between sectors.)ii) What additional pieces of information about labor demand would you need to determine if the total wage income of all employed teenagers taken together (i.e., in both the covered and uncovered segments) will increase or decrease as a increase in the minimum wage rate to $10.10? result of the Explain briefly.

Question 3: Biff's Burgers is a purely competitive supplier of hamburgers (a product high in saturated fat, which can cause heart disease) with the typical U-shaped cost curves- All suppliers of hamburgers (e•g•, Wendy's, McDonald's, Burger King, cost curves. Dave's) have the identical

a) Assume that the hamburger market is in equilibrium at a price of $3.00 day, 00 and a quantity bought and sold of 1,000,000 per and that Biff's and all other hamburger producers are producing 100 hamburgers per day and are making a normal profit. Illustrate this situation using graphs of both the hamburger market and Biff's Burgers (i.e., a representative hamburger firm.) In drawing the graph of the firm, the only cost curves you need show are short-run marginal cost and short-run average total cost.

b) In a finding which stuns the scientific community and receives widespread public attention, researchers determine that the high levels of saturated fat found in hamburgers actually prevent heart disease, prolong life, and increase the quality of life.
Using the graphs in question 3a) above, show the likely short-run impact of this finding on the hamburger market and on Biff's in terms of each of the following: price, quantity, and economic profit.

c) Using two new graphs, explain and illustrate what happens in the long run to both the hamburger market and Biff's in terms of each of the following: price, quantity, economic profit, productive efficiency, and allocative efficiency. You can assume that the hamburger industry is a constant cost industry (i.e., that there is no upward or downward shift in the marginal and average total cost curves as the industry expands or contracts).

d) Based on your answer to question 3c) above, in what sense can it be argued that, under pure competition, firms' pursuit of maximum profit is consistent with (and in fact advances) the social interest?

Question 4: Working feverishly around the clock, scientists at Biff's develop a solar-based cooking technique and a new secret sauce (a blending of herbs, exotic spices, and nuclear waste) that together produce a hamburger the likes of which have never been seen before. The cooking technique and secret sauce are patented, giving Biff's exclusive use of the technique and sauce forever (in other words, no other hamburger firm is legally allowed to use the cooking technique and the secret sauce). The new hamburger is an instant success, and the market share of the other hamburger producers falls nearly to zero. Biff's buys out or otherwise takes over all of these other producers, facilitating the takeovers with a series of bribes to key officials in the Federal Trade Commission and the Antitrust Division of the Department of Justice.

a) Using a new graph, show the price and quantity of hamburgers after the takeovers as well as Biff's economic profit (you can assume that economic profit > 0).

b) Compare (in words) the outcome in the hamburger market and for the representative firm (i.e., Biff's) after the takeovers with the long-run outcome in question 3c) above with respect to each of the following: price, quantity, economic profit, productive ef-ficiency, and allocative efficiency.

c) Assuming no change in the demand for hamburgers, will these differences persist over time? Explain fully, yet succinctly.

d) Based on your answers to questions 4b) and 4c) above, in what sense can it be argued that monopoly leads to a conflict between firms' pursuit of maximum profit and the social interest?