...Mankiw – Chapter 9 SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes 1. Since wool suits are cheaper in neighboring countries, Autarka would import suits if it were to allow free trade. 2. Figure 1 shows the supply and demand for wool suits in Autarka. With no trade, the price of suits is 3 ounces of gold, consumer surplus is area A, producer surplus is area B + C, and total surplus is area A + B + C. When trade is allowed, the price falls to 2 ounces of gold, consumer surplus rises to A + B + D (an increase of B + D), producer surplus falls to C (a decline of B), so total surplus rises to A + B + C + D (an increase of D). A tariff on suit imports would reduce the increase in consumer surplus, reduce the decline in producer surplus, and reduce the gain in total surplus. Figure 1 3. Lobbyists for the textile industry might make five arguments in favor of a ban on the import of wool suits: (1) imports of wool suits destroy domestic jobs; (2) the wool-suit industry is vital for national security; (3) the wool-suit industry is just starting up and needs protection from foreign competition until it gets stronger; (4) other countries are unfairly subsidizing their wool-suit industries; and (5) the ban on the importation of wool suits can be used as a bargaining chip in international negotiations. In defending free trade in wool suits, you could argue that: (1) free trade creates jobs in some industries even as it destroys jobs in the wool-suit industry and allows Autarka to enjoy a higher...
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...Additional study materials are recommended in each area below to help you master the material. Personalized Study Guide Results: Score: 12 / 12 Concepts Mastery Questions Pricing Decisions 100% Market Systems 100% Market Equilibrium 100% Concept: Pricing Decisions Mastery 100% Questions 1 . Revenue increases when • A. producer surplus increases Correct : Producer surplus is the difference between the minimum price the producer is willing to receive and what they actually receive. The surplus is their profit, and the larger the surplus, the greater their profit on the good. When it decreases, the producer receives a price closer to the minimum acceptable. The consumer surplus measures what the consumer is willing to pay and that price’s difference from the market price. The closer to the market price, the higher the consumer surplus, as consumers are spending less than they are willing to, and the less spent, the lower the revenue will be for the good. Materials • Producer Surplus 2 . An increase in the price of an inelastic goods • C. increases revenues Correct : Inelastic goods are necessities that consumers continue to purchase even when the price increases. This increases the revenue, as more is paid for each good. The percentage change in price increases faster than the change in quantity, which may remain constant. When more is paid for a good or a service, revenue increases. Materials • Price Elasticity and the Total-Revenue Curve •...
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...SOLUTIONS TO TEXT PROBLEMS: Chapter 6 Quick Quizzes 1. A price ceiling is a legal maximum on the price at which a good can be sold. Examples of price ceilings include rent control, price controls on gasoline in the 1970s, and price ceilings on water during a drought. A price floor is a legal minimum on the price at which a good can be sold. Examples of price floors include the minimum wage and farm-support prices. A price ceiling leads to a shortage, if the ceiling is binding, because suppliers won’t produce enough goods to meet demand unless the price is allowed to rise above the ceiling. A price floor leads to a surplus, if the floor is binding, because suppliers produce more goods than are demanded unless the price is allowed to fall below the floor. 2. With no tax, as shown in Figure 1, the demand curve is D1 and the supply curve is S. The equilibrium price is P1 and the equilibrium quantity is Q1. If the tax is imposed on car buyers, the demand curve shifts down by the amount of the tax ($1000) to D2. The downward shift in the demand curve leads to a decline in the equilibrium price to P2 (the amount received by sellers from buyers) and a decline in the equilibrium quantity to Q2. The price received by sellers declines by P1 – P2, shown in the figure as ( PS. Buyers pay a total of P2 + $1,000, an increase in what they pay of P2 + $1,000 - P1, shown in the figure as ( PB. [pic] Figure 1 If the tax is imposed on car sellers, as shown in Figure...
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...Question 1 [10 marks] Suppose the expected market demand for tickets to the Australian Open golf tournament to be held in Queensland in November is given by D = 40,000 -1,000P and the supply of tickets is S = 20,000. Tickets for a golfing tournament have negligible Marginal cost. Hence supply will be Perfectly Elastic. This means that 20 000 tickets will be supplied regardless of demand Demand = (40,000 – 1,000 * Ticket Price) tickets Supply = (20,000 + 0*Ticket Price) tickets a. What is the equilibrium price of a ticket to the tournament? How many tickets will be sold? [2 marks] At equilibrium price: Supply = Demand 20,000 = 40,000 – 1,000P 1,000P = 20,000 P = 20 Equilibrium Price is $20 At price = $20: Supply = 20000 + 0*price = 20000 The Number of tickets sold is 20,000 b. Draw a diagram illustrating the demand and supply curves and the equilibrium price and quantity. [1 mark] [pic] The rising incomes of mine workers in Queensland, who happen to be big golf fans planning to attend the tournament, has resulted in a new demand curve given by D = 70,000 – 2,000P. Supply of tickets to the tournament remains at S = 20,000 Demand = (70,000 – 2,000 * Ticket Price) tickets Supply = (20,000 + 0*Ticket Price) tickets c. What is the new equilibrium price of a ticket to the tournament? How many tickets...
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...imports to q3 − q2 units—what they would have been under the tariff—what impact would this have on the product price for home-country consumers and producers? Explain. b. Under a quota system, the government issues import licenses giving the holder the right to import one unit of the good. How much revenue can the government earn if it sells all q3 − q2 licenses to the highest bidder? Illustrate your answer on your diagram. c. What impact does this quota system have on home-country welfare? Who gains, who loses, and by how much? Illustrate your answer on your diagram. d. Which is a better way to restrict free trade—quotas or tariffs? Is the welfare loss under this quota system larger or smaller than the loss under a tariff with identical effects on import volume? Explain your answer. Answer: a. The supply curve shifts out, horizontally, by the amount of the quota, to Sdomestic + quota. This has no impact on price, compared to the tariff. The price remains[pic]with the quota. [pic] b. We know foreign firms' average costs of production are p*, so, if the licenses are free, foreign firms make a positive economic profit equal to [pic] per unit. Therefore, foreign firms will bid the price of a license up to [pic] and still earn a normal economic profit on all of their exports. c. Consumers lose the entire shaded area,...
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...BU224-02 Microeconomics Problem - 1 A) In the absence of any price floor, consumer surplus is the area below the demand curve but above the equilibrium price. Equilibrium price = $0.13 Equilibrium quantity = 211.5 billion pound. So, consumer surplus = ½ * (0.2-0.13)*211.5 = $7.403 billion B) Producer surplus is the area above the supply curve but below the equilibrium price. Producer surplus = ½ *(0.13-0.06)*211.5 = $7.403 billion C) Total surplus = consumer surplus + producer surplus = $7.403 billion + $7.403 billion = $14.806 billion D) With the price floor at $0.17 per pound, consumer surplus is the area below the demand curve but above the price. Consumer surplus = ½ * (0.20-0.17)*211 = $3.165 billion E) With the price floor at $0.17 per pound, producer surplus is the area above the supply curve but below the price. Producer surplus = ½* (0.17-0.06)*212.5 = $11.688 billion F) USDA buys 1.5 billion pounds of cheese at a price $0.17 per pound. So, USDA spends $0.17*1.5 billion = $0.255 billion G) Total surplus when there is price floor = consumer surplus + producer surplus - money spent by the USDA = $3.165+$11.688-$0.255 = $14.598 billion H) This is less than the total surplus without price floor. Problem - 2 A) Using midpoint method, PED. = [(Q2 - Q1) / ((Q1 + Q2) / 2)] / [(P2 - P1) / ((P1 + P2) / 2)] When the price of an ice cream...
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...‘Market Efficiency’ PowerPoints and Activities 2008/20144[2] ‘Market efficiency’ PowerPoints and activities 1 Content The documents in this section provide support material for the stage 2 units. Document 1. Covers A sample program for stage 2 which covers unit 2AECO in the contexts of options from Economics D304 Sample lesson outlines for Business firms and markets–Unit 2AECO Notes and PowerPoint slides on Market efficiency and equity—Unit 2AECO A range of teaching and learning materials covering the concepts of Market efficiency and equity for the 2AECO unit and some applications of these concepts: 4.1 4.2 4.3 4.4 4.5 4.6 4.7 The Sundance film festival—A case study with suggested answers PowerPoint slides—Efficiency and equity, concepts and applications PowerPoint companion—Efficiency and equity, concepts and applications Extension activities—The concepts of efficiency and equity Extension activities discussion topics Emissions trading schemes (ETS) Review Questions—Efficiency and Equity, with suggested answers 2. 3. 4. 2 ‘Market efficiency’ PowerPoints and activities Document 1: Sample program for Stage 2 The purpose of this document is provide an example of how the Stage 2 units can be programmed by drawing on four of the Options from the Economics D304 subject and using them as contexts for unit 2AECO. In this sample program the options from D304 drawn on to provide contexts are Australian market forms, Firms and production and Environmental...
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...Answers to selected “Problems and Applications” Questions in Mankiw Chapter 1: 4) If you spend $100 now instead of saving it for a year and earning 5 percent interest, you are giving up the opportunity to spend $105 a year from now. The idea that money has a time value is the basis for the field of finance, the subfield of economics that has to do with prices of financial instruments like stocks and bonds. 5) The fact that you've already sunk $5 million isn't relevant to your decision anymore, since that money is gone. What matters now is the chance to earn profits at the margin. If you spend another $1 million and can generate sales of $3 million, you'll earn $2 million in marginal profit, so you should do so. You are right to think that the project has lost a total of $3 million ($6 million in costs and only $3 million in revenue) and you shouldn't have started it. That's true, but if you don't spend the additional $1 million, you won't have any sales and your losses will be $5 million. not the total profit, but the profit you can earn at the margin. So what matters is In fact, you'd pay up to $3 million to complete development; any more than that, and you won't be increasing profit at the margin. Chapter 2: 4) a. Figure 1 shows a production possibilities frontier between guns and butter. It is bowed out because when most of the economy’s resources are being used to produce butter, the frontier is steep and when most...
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...Identify the choice that best completes the statement or answers the question. ____ 1. Welfare economics is the study of how a. the allocation of resources affects economic well-being. b. a price ceiling compares to a price floor. c. the government helps poor people. d. a consumer’s optimal choice affects her demand curve. ____ 2. Consumer surplus a. is the amount of a good that a consumer can buy at a price below equilibrium price. b. is the amount a consumer is willing to pay minus the amount the consumer actually pays. c. is the number of consumers who are excluded from a market because of scarcity. d. measures how much a seller values a good. Table 7-2 This table refers to five possible buyers' willingness to pay for a case of Vanilla Coke. Buyer Willingness To Pay David $8.50 Laura $7.00 Megan $5.50 Mallory $4.00 Audrey $3.50 ____ 3. Refer to Table 7-2. Which of the following is not true? a. At a price of $9.00, no buyer is willing to purchase Vanilla Coke. b. At a price of $5.50, Megan is indifferent between buying a case of Vanilla Coke and not buying one. c. At a price of $4.00, total consumer surplus in the market will be $9.00. d. All of the above are correct. 1 ID: A Name: ________________________ Table 7-6 Buyer Michael Earvin Larry Charles ID: A Willingness to Pay $500 $400 $350 $300 ____ 4. Refer to Table 7-6. You have an extra ticket to the Midwest Regional Sweet 16 game in the men’s NCAA basketball...
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...Midterm 2 Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Welfare economics is the study of how a. the allocation of resources affects economic well-being. b. a price ceiling compares to a price floor. c. the government helps poor people. d. a consumer’s optimal choice affects her demand curve. 2. Consumer surplus a. is the amount of a good that a consumer can buy at a price below equilibrium price. b. is the amount a consumer is willing to pay minus the amount the consumer actually pays. c. is the number of consumers who are excluded from a market because of scarcity. d. measures how much a seller values a good. Table 7-2 This table refers to five possible buyers' willingness to pay for a case of Vanilla Coke. Buyer Willingness To Pay David $8.50 Laura $7.00 Megan $5.50 Mallory $4.00 Audrey $3.50 ____ 3. Refer to Table 7-2. Which of the following is not true? a. At a price of $9.00, no buyer is willing to purchase Vanilla Coke. b. At a price of $5.50, Megan is indifferent between buying a case of Vanilla Coke and not buying one. c. At a price of $4.00, total consumer surplus in the market will be $9.00. d. All of the above are correct. ____ 1 Name: ________________________ Table 7-6 Buyer Michael Earvin Larry Charles ____ ID: A Willingness to Pay $500 $400 $350 $300 4. Refer to Table 7-6. You have an extra ticket to the Midwest Regional Sweet 16 game in the men’s NCAA basketball tournament. The table shows...
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...well-being of a society? Suppose there is a all-powerful, well-intentioned dictator called a social planner who can allocate goods among members of society. This social planner wants to maximize the welfare of everyone in society. Should the social planner allow the economy to reach an equilibrium by itself and stay there, or alter the equilibrium in some way? How to measure welfare of everyone in society? One measure is the sum of everyone’s surplus, called total surplus. This is consumer surplus plus producer surplus. Since consumer surplus measures the benefit consumers receive from participating in a market, and producer surplus measures the benefit producers receive from participating in a market, total surplus measures the sum of all individual benefits from participating in a market. Consumer surplus distortion of the market, amount paid by buyers equals amount received by sellers. So under these conditions, the total surplus equals Total surplus = total value to buyers − total cost to sellers. An allocation is efficient if it maximizes total surplus. This means that the difference between value to buyers and cost to sellers is maximized. It is maximized when every buyer whose value of a good is higher than the cost to a seller of the good, buys the good from a seller whose cost is lower than the buyer’s value. An allocation is inefficient if either a good is not being produced by sellers with lowest cost, or if it is not being bought by buyers with the highest valuation of the good. Moving...
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...transportation costs are zero and that demand and supply curves are linear. | With $5 per unit Tariff | Free Trade | World price of shirts | $20 | $20 | Tariff per unit | $5 | $0 | Price per unit of shirts | $25 | $20 | Quantity of Shirts (‘000s) | 200 | 250 | Quantity of Shirts (‘000s) | 120 | 50 | (a) Calculate the quantity imported under free trade and with the tariff. Import quantity = domestic consumption – domestic production Under free trade: 250 – 50 = 200 With the tariff: 200 – 120 = 80 (b) Use a diagram to illustrate the effect of the tariff on prices and quantities in this case, and then calculate the changes in consumer surplus, producer surplus, and tariff revenue resulting from the tariff. Changes in: Consumer surplus = -(a+b+c+d) = (200x5) + 0.5(50x5) = -$1,125,000 (loss) Producer surplus= a = (50x5) + 0.5(70x5)= $425,000 (gain) Tariff revenue = c = 80x5 = 400,000 (gain) Net national welfare = -(b+d) = -0.5[(70x5) + (50x50] = - $300,000 (loss) P($) D S 25 Pw+t a b c d 20 Pw 50 120 200 250 Question 2: The following table summarizes two hypothetical situations in the market for T-shirts in a large economy. The first column depicts the situation in the presence of a $10 per unit tariff on imported T-shirts. The second column represents the situation under free trade. You may assume that demand and supply curves are linear. | With t=$10 | Free Trade | World price | $45 | $50...
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...APPLICATION OF THE INTEGRAL I: CONSUMER AND PRODUCER SURPLUS 1. Supply and demand One of the most fundamental economic models is the law of supply and demand for a certain product (milk, bread, fuel etc.) or service (transportation, health care, education etc.) in a free-market environment. In this model the quantity of a certain item produced and sold is described by two curves, called the supply and demand curves of the item. Definition 1.1. The supply function or supply curve gives the quantity of an item that producers will supply at any given price. The demand function or demand curve gives the quantity that consumers will demand at any given price. We will denote the price per unit by p and the quantity supplied or demanded at that price by q. As is the convention in economics, we will always write p as a function of q. Thus the supply curve will be denoted by the formula p = S(q) and represented by a graph where the x and y axes correspond to q and p values respectively. Similarly, we will use p = D(q) to denote the demand curve. As you might expect, the supply function S is increasing – the higher the price, the more the producers will supply. The demand function D is decreasing – the higher the price, the less the consumers will buy. Definition 1.2. The point of intersection (qe , pe ) of the supply and demand curves is called the market equilibrium point. The numbers qe and pe are termed equilibrium quantity and equilibrium price respectively. The economic significance...
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...Surplus Deficits ECO/372 September 10, 2010 Surplus Deficits A surplus in this economy can be beneficial to many businesses and as a whole society as well. A surplus benefits out society when producers and consumers sell their goods or services to the public. It is known that economic surplus is made up of two parts which are producers and consumer surplus. The producer surplus is the benefit that it receives from doing their service to the public at whatever the market price is at that time, rather than selling their services at a much cheaper rate. A consumer surplus is very different and opposite of that of a producer surplus. A consumer surplus is the benefit that it receives from purchasing their services from the public where they would be willing to pay more for the service they purchased. A government budget surplus can be very beneficial to the economy. A government budget surplus can be beneficial in that it gains revenue through taxes and other fees associated with the surplus. A budget surplus does have its effect on the economy in how the government officials use their funds. Two periods in time that comes to mind where the United States had to run their budget surpluses is the War in Iraq from 2003 to 2011, and the September 11th, 2001 attacks in New York at the World Trade Center. According to “A History of Surpluses...
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...Main topics/concepts * Scarcity * Scarcity means that society has limited resources and cannot produce all the goods and services people want. * Opportunity costs * The opportunity cost of an item is what you give up to obtain that item. * Equity–efficiency trade off * Individual level * Allocation of time between work and leisure * Society level * Guns vs. Butter is the classic trade-off between production of consumption goods and military spending * The efficiency versus equity trade-off * Efficiency: Society gets the most that it can from its scarce resources. * Equity: The benefits of those resources are distributed fairly among the members of society. * Models: Circular flow diagram and PPF * The circular-flow diagram shows how dollars flow through markets among households and firms in an economy * Firms (Produce and sell goods and services) * Households (Buy and consume goods and services.) * The production possibilities frontier (PPF) is a graph showing the combinations of output that an economy can possibly produce given * the available factors of production; and * the available production technology. * Normative vs. positive statements * Positive statements are about how the world is. * Normative statements are about how the world ought to be. * When economists make normative statements, they are...
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