Leon goes to the clothing store to buy a new T-shirt, for which he is willing to pay up to $10. He picks out one he likes with a price tag of exactly $10. When he is paying for it, he learns that the T-shirt has been discounted by 50%.
Alberto goes to the CD store hoping to find a used copy of Nirvana’s Greatest Hits for up to $10. The store has one copy selling for $10, which he purchases.
After soccer practice, Stacey is willing to pay $2 for a bottle of mineral water. The 7-Eleven sells mineral water for $2.25 per bottle, so she declines to purchase it.
Gordon lists his old Lionel electric trains on eBay. He sets a minimum acceptable price, known as his reserve price, of $75. After five days of bidding, the final high bid is exactly $75. He accepts the bid.
So-Hee advertises her car for sale in the used-car section of the student newspaper for $2,000, but she is willing to sell the car for any price higher than $1,500. The best offer she gets is $1,200, which she declines.
Sanjay likes his job so much that he would be willing to do it for free. However, his annual salary is $80,000.
Suppose that the price of each ride is $5. At that price, how much consumer surplus does an individual consumer get? (Recall that the area of a right triangle is ½ × the height of the triangle × the base of the triangle.)
Suppose that Fun World considers charging an admission fee, even though it maintains the price of each ride at $5. What is the maximum admission fee it could charge? (Assume that all potential customers have enough money to pay the fee.)
Suppose that Fun World lowered the price of each ride to zero. How much consumer surplus does an individual consumer get? What is the maximum admission fee Fun World could charge?
Suppose the city sets the price of taxi rides at $4 per ride, and at $4 the taxi driver is able to sell as many taxi rides as he desires. What is this taxi driver’s producer surplus? (Recall that the area of a right triangle is ½ × the height of the triangle × the base of the triangle.)
Suppose that the city keeps the price of a taxi ride set at $4, but it decides to charge taxi drivers a “licensing fee.” What is the maximum licensing fee the city could extract from this taxi driver?
Suppose that the city allowed the price of taxi rides to increase to $8 per ride. Again assume that, at this price, the taxi driver sells as many rides as he is willing to offer. How much producer surplus does an individual taxi driver now get? What is the maximum licensing fee the city could charge this taxi driver?
Use a diagram to show the effect on the rental market of the elimination of rent control. What will happen to the quality and quantity of rental housing supplied?
Use a second diagram to show the additional effect of the income-supplement policy on the market. What effect does it have on the market rent and quantity of rental housing supplied in comparison to your answers to part a?
Are tenants better or worse off as a result of these policies? Are landlords better or worse off? Is society as a whole better or worse off?
From a political standpoint, why do you think cities have been more likely to resort to rent control rather than a policy of income supplements to help low-income people pay for housing?
Quantity of rides (millions per year) | ||
---|---|---|
Fare (per ride) | Quantity demanded | Quantity supplied |
$7.00 | 10 | 12 |
6.50 | 11 | 11 |
6.00 | 12 | 10 |
5.50 | 13 | 9 |
5.00 | 14 | 8 |
4.50 | 15 | 7 |
Assume that there are no restrictions on the number of taxi rides that can be supplied (there is no medallion system). Find the equilibrium price and quantity.
Suppose that the mayor sets a price ceiling at $5.50. How large is the shortage of rides? Illustrate with a diagram. Who loses and who benefits from this policy?
Suppose that the stock market crashes and, as a result, people in Gotham City are poorer. This reduces the quantity of taxi rides demanded by 6 million rides per year at any given price. What effect will the mayor’s new policy have now? Illustrate with a diagram.
Suppose that the stock market rises and the demand for taxi rides returns to normal (that is, returns to the demand schedule given in the table). The mayor now decides to ingratiate himself with taxi drivers. He announces a policy in which operating licenses are given to existing taxi drivers; the number of licenses is restricted such that only 10 million rides per year can be given. Illustrate the effect of this policy on the market, and indicate the resulting price and quantity transacted. What is the quota rent per ride?
Draw a diagram showing the effect of the policy. Did the policy act as a price ceiling or a price floor?
What kinds of inefficiencies were likely to have arisen when the controlled price of bread was above the market price? Explain in detail.
One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread and therefore an increase in its market price. New York bakers found that the controlled price of bread in New York was below the market price.
Draw a diagram showing the effect of the price control on the market for bread during this one-year period. Did the policy act as a price ceiling or a price floor?
What kinds of inefficiencies do you think occurred during this period? Explain in detail.
Wage (per year) | Quantity demanded (new job offers per year) | Quantity supplied (new job seekers per year) |
---|---|---|
Є45,000 | 200,000 | 325,000 |
40,000 | 220,000 | 320,000 |
35,000 | 250,000 | 310,000 |
30,000 | 290,000 | 290,000 |
25,000 | 370,000 | 200,000 |
In the absence of government interference, what are the equilibrium wage and number of graduates hired per year? Illustrate with a diagram. Will there be anyone seeking a job at the equilibrium wage who is unable to find one—that is, will there be anyone who is involuntarily unemployed?
Suppose the French government sets a minimum yearly wage of €35,000. Is there any involuntary unemployment at this wage? If so, how much? Illustrate with a diagram. What if the minimum wage is set at €40,000? Also illustrate with a diagram.
Given your answer to part b and the information in the table, what do you think is the relationship between the level of involuntary unemployment and the level of the minimum wage? Who benefits from such a policy? Who loses? What is the missed opportunity here?
Until recently, the standard number of hours worked per week for a full-time job in France was 39 hours, just as in the United States. But in response to social unrest over high levels of involuntary unemployment, the French government instituted a 35-hour workweek—a worker could not work more than 35 hours per week even if both the worker and employer wanted it. The motivation behind this policy was that if current employees worked fewer hours, employers would be forced to hire more new workers. Assume that it is costly for employers to train new workers. French employers were greatly opposed to this policy and threatened to move their operations to neighboring countries that did not have such employment restrictions. Can you explain their attitude? Give an example of both an inefficiency and an illegal activity that are likely to arise from this policy.
Quantity of swordfish (millions of pounds per year) | ||
---|---|---|
Price of swordfish (per pound) | Quantity demanded | Quantity supplied |
$20 | 6 | 15 |
18 | 7 | 13 |
16 | 8 | 11 |
14 | 9 | 9 |
12 | 10 | 7 |
Use a diagram to show the effect of the quota on the market for swordfish in 1991. In your diagram, illustrate the deadweight loss from inefficiently low quantity.
How do you think fishermen will change how they fish in response to this policy?
In the absence of government restrictions, what are the equilibrium price and quantity?
What is the demand price at which consumers wish to purchase 80,000 pounds of lobsters?
What is the supply price at which suppliers are willing to supply 80,000 pounds of lobsters?
What is the quota rent per pound of lobster when 80,000 pounds are sold? Illustrate the quota rent and the deadweight loss on the diagram.
Explain a transaction that benefits both buyer and seller but is prevented by the quota restriction.
Show the consumer and producer surplus before the introduction of the price ceiling.
After the introduction of the price ceiling, the price falls to PC and the quantity bought and sold falls to QC.
Show the consumer surplus after the introduction of the price ceiling (assuming that the consumers with the highest willingness to pay get to buy the available coffee beans; that is, assuming that there is no inefficient allocation to consumers).
Show the producer surplus after the introduction of the price ceiling (assuming that the producers with the lowest cost get to sell their coffee beans; that is, assuming that there is no inefficient allocation of sales among producers).
Using the diagram, show how much of what was producer surplus before the introduction of the price ceiling has been transferred to consumers as a result of the price ceiling.
Using the diagram, show how much of what was total surplus before the introduction of the price ceiling has been lost. That is, how great is the deadweight loss?
According to the Bureau of Transportation Statistics, due to an increase in demand, the average domestic airline fare increased from $319.85 in the fourth quarter of 2009 to $328.12 in the first quarter of 2010, an increase of $8.27. The number of passenger tickets sold in the fourth quarter of 2009 was 151.4 million. Over the same period, the airlines’ costs remained roughly the same: the price of jet fuel averaged around $2 per gallon in both quarters (Source: Energy Information Administration), and airline pilots’ salaries remained roughly the same (according to the Bureau of Labor Statistics, they averaged $117,060 per year in 2009).
Can you determine precisely by how much producer surplus has increased as a result of the $8.27 increase in the average fare? If you cannot be precise, can you determine whether it will be less than, or more than, a specific amount?
In the absence of a price floor, how much consumer surplus is created? How much producer surplus? What is the total surplus?
With the price floor at $1.05 per pound of butter, consumers buy 1.6 billion pounds of butter. How much consumer surplus is created now?
With the price floor at $1.05 per pound of butter, producers sell 1.7 billion pounds of butter (some to consumers and some to the USDA). How much producer surplus is created now?
How much money does the USDA spend on buying up surplus butter?
Taxes must be collected to pay for the purchases of surplus butter by the USDA. As a result, total surplus (producer plus consumer) is reduced by the amount the USDA spent on buying surplus butter. Using your answers for parts b–d, what is the total surplus when there is a price floor? How does this compare to the total surplus without a price floor from part a?
Quantity of milk (millions of pints per year) | ||
---|---|---|
Price of milk (per pint) | Quantity demanded | Quantity supplied |
$1.20 | 550 | 850 |
1.10 | 600 | 800 |
1.00 | 650 | 750 |
0.90 | 700 | 700 |
0.80 | 750 | 650 |
In a diagram, show the deadweight loss from the inefficiently low quantity bought and sold.
How much surplus milk will be produced as a result of this policy?
What will be the cost to the government of this policy?
Since milk is an important source of protein and calcium, the government decides to provide the surplus milk it purchases to elementary schools at a price of only $0.60 per pint. Assume that schools will buy any amount of milk available at this low price. But parents now reduce their purchases of milk at any price by 50 million pints per year because they know their children are getting milk at school. How much will the dairy program now cost the government?
Explain how inefficiencies in the form of inefficient allocation of sales among sellers and wasted resources arise from this policy.
If the government sets a price floor of $5 per bushel, how many bushels of corn are produced? How many are purchased by consumers? By the government? How much does the program cost the government? How much revenue do corn farmers receive?
Suppose the government sets a target price of $5 per bushel for any quantity supplied up to 1,000 bushels. How many bushels of corn are purchased by consumers and at what price? By the government? How much does the program cost the government? How much revenue do corn farmers receive?
Which of these programs (in parts a and b) costs corn consumers more? Which program costs the government more? Explain.
Is one of these policies less inefficient than the other? Explain.
Looking at the data on airline ticket prices in the diagram, do you think the price floor that existed before 1978 was binding or nonbinding? That is, do you think it was set above or below the equilibrium price? Draw a supply and demand diagram, showing where the price floor that existed before 1978 was in relation to the equilibrium price.
Most economists agree that the average airline ticket price per mile traveled actually fell as a result of the Airline Deregulation Act. How might you reconcile that view with what you see in the diagram?