1. Describe how consumer surplus and producer surplus are measured.

2. Using the following graph, show what happens to consumer surplus when a new technology reduces the cost of production.

3. Explain why deadweight loss can occur with a price below equilibrium even when some consumers benefit from it.

4. Provide three examples of activities that generate external benefits and three activities that generate external costs.

5. Why does an effective price ceiling appear below the equilibrium rather than above it?

6. If a price floor is reduced toward equilibrium but not below it, explain what happens to the total surplus and deadweight loss in this market.

7. An increasing number of charities have turned to online auctions as a way to raise money by selling unique experiences donated by celebrities (such as a meet-and-greet with a celebrity before a concert or a walk-on role on a television show). Why would the use of auctions lead to a better outcome for the charity as opposed to just setting a fixed price? Explain using the concepts of consumer surplus and producer surplus.

8. Luigi’s is the only pizzeria in a small town in northern Alaska. It is constantly busy, but there is never a wait for a table. One of Luigi’s friends suggests that he would earn much more money if he raises his menu prices by 25%, because no one is likely to open a new pizzeria in the near future. If Luigi follows his friend’s advice, what would happen to consumer and producer surplus, and efficiency, in this market?

9. Over the past decade, many American candy companies, including Hershey Company, Brach’s Confections, and Ferrara Pan Candy, opened factories in Mexico and Canada to produce candy that is then shipped back to the United States for sale. Although lower wages in Mexico might explain part of this move, wages in Canada are comparable to U.S. wages. Explain how U.S. price supports (price floors) for the sugar industry may have encouraged these moves.

10. Academic studies suggest that the amount people tip in restaurants is only slightly related to the quality of service, and that tips are poor measures of how happy people are with the service. Is this another example of market failure? What might account for this situation?

11. In cities around the country, the government provides assistance to families with low incomes to rent apartments at prices capped by the U.S. Department of Housing and Urban Development (HUD), essentially setting a price ceiling on apartments. These designated apartments tend to rent quickly, and tenants are less likely to move once they find an apartment. Explain how rent controls affect market prices for non-rent-controlled apartments. How are incentives by landlords affected in terms of maintaining rent-controlled and non-rent-controlled apartments? Would your answer change if the government provided a subsidy payment to landlords to offset the difference between the price ceiling and the market price?

12. The U.S. Department of Labor reports that of the roughly 150 million people employed, just over half are paid by the hour, but fewer than 5% earn the minimum wage or less; 95% of wage earners earn more. And of those earning the minimum wage or less, 25% are teenagers living at home. If so few people are affected by the minimum wage, why does it often seem to be such a contentious political issue?

13. Over the past few years, several U.S. states have either legalized recreational marijuana or at least decriminalized its use (“Would Legalizing Marijuana Help the Economy?,” Debate.org). Proponents argue that legalizing the use of marijuana would help the economy by boosting economic activity and reducing costs. Do you agree? Why or why not? Use the concepts of supply and demand, and consumer and producer surplus to support your answer.

14. In 2015 Governor Cuomo of New York approved a measure to raise the minimum wage for all fast-food workers to $15 per hour by 2018 (“New York Oks $15 Minimum Wage for Fast-Food Workers,” USA Today, September 11, 2015). Proponents argue that this policy helps the working poor who hold full-time jobs yet are not able to pull their families out of poverty. Meanwhile, opponents argue that the policy would cause harm in the labor market. Provide an example of a situation that would support each side’s argument.

15. Consider the market shown in the following graph.

16. Suppose the U.S. government places a price ceiling on the sale of gasoline at $2 per gallon in the accompanying figure.

17. According to By the Numbers, how much would you earn in one year if you worked 2,000 hours (50 weeks × 40 hours) at the federal minimum wage? How much more would you earn per year if you worked at the minimum wage rate in Washington state?

18. According to By the Numbers, which state has the highest average in-state tuition in the country, and which state has the lowest average in-state tuition? How do universities deal with shortages when in-state tuition prices are below the equilibrium price?