ECON CH1 EXAM HMWK ?'S

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The economist Bryan Caplan recently found a pair of $10 arch supports that saved him from the pain of major foot surgery. As he stated on his blog (http://econlog.econlib.org), he would have been willing to pay $100,000 to fix his foot problem, but instead he only paid a few dollars. If the sales tax was 5 percent on this product, how much revenue did the government raise when Bryan bought his arch supports? If the government could have taxed Bryan based on his willingness to pay instead of on how much he actually paid, how much sales tax would Bryan have had to pay?

$0.50; $5,000

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $4, how much producer surplus goes to Vincent?

Using the following diagram, calculate total producer surplus if the price of oil is $50 per barrel. Note that MBD stands for "millions of barrels per day," which is how the supply of oil is usually measured.

$1,350 million

In New York City, some apartments are under strict rent control, while others are not. This is a theme in many novels and movies about New York, including Bonfire of the Vanities and When Harry Met Sally. One predictable side effect of rent control is the creation of a black market. Let's think about whether it's a good idea to allow this black market to exist. Harry is lucky enough to get a rent-controlled apartment for $300 per month. The market rent on such an apartment is $3,000 per month. Harry himself values the apartment at $2,000 per month, and he'd be quite happy with a regular, $2,000-per-month New York apartment. If he stays in the apartment, how much consumer surplus does he enjoy?

$1,700

Consider the figure below for the total demand for plasma TVs. What is the total consumer surplus at a price of $2,010 per TV, where 1,200 TVs were demanded?

$1,794,000

Consider the following supply curve for oil. Note that MBD stands for "millions of barrels per day," which is how the supply of oil is usually measured. What is the lowest price at which suppliers of oil would be willing to supply 20 million barrels per day?

$12

In March 2002, then-President George W. Bush put a tariff on imported steel as a means of protecting the domestic steel industry. In February, before the tariff went into effect, the United States produced 7.4 million metric tons of crude steel and imported about 2.8 million metric tons of steel products at an average price of $363 per metric ton. Two months later, after the tariff was in effect, U.S. production increased to 7.9 million metric tons. The volume of imported steel fell to about 1.7 million metric tons, but the price of the imported steel rose to about $448 per metric ton. The diagram below shows this. What is the revenue for the government from imposing this tariff?

$144.5/metric ton

Let's count the value of lost gains from trade in a regulated market. The government decides it wants to make basic bicycles more affordable, so it passes a law requiring that all one-speed bicycles sell for $30, well below the market price. Use the figure below to calculate the lost gains from trade. Assume that the supply and demand curves are straight lines. What is the value of the sum of lost consumer surplus and lost producer surplus?

$2,500

Consider the following demand curve for oil. Note that MBD stands for "millions of barrels per day," which is how the quantity of oil is usually measured. What is the maximum price (per barrel) consumers will pay for 20 million barrels of oil each day?

$25

Your roommate just bought an iPod for $200. She would have been willing to pay $500 for a machine that could store and replay that much music. How much consumer surplus does your roommate enjoy from the iPod?

$300

During a crisis such as Hurricane Katrina, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?

$35

In Sucrosia, the supply curve for sugar is as follows:Under pressure from nutrition activists, the government decides to tax sugar producers with a $5 excise tax per 100-pound bag. After the tax is enacted, what price will bring forth a quantity of 10,000?

$35

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). How large are the potential gains from trade if Jules and Vincent agree to make this trade? In other words, what is the sum of producer and consumer surplus if the trade happens?

If the demand and supply curves are as in the figure below, then what would consumer surplus be if the quantity supplied were 1,000 but there were no price controls?

$5,000

Let's count the value of lost gains from trade in a regulated market. The government decides it wants to make basic bicycles more affordable, so it passes a law requiring that all one-speed bicycles sell for $30, well below the market price. Use the figure below to calculate the lost gains from trade. Assume that the supply and demand curves are straight lines. If people have to wait in line to purchase bicycles, what is the total value of wasted time in the price-controlled market?

$5,000

Suppose your state government has decided to tax donuts. Currently, in your state, 300,000 donuts are sold every day. Three possible taxes are being considered by lawmakers: a 20-cent-per-donut tax, which would decrease donut sales by 50,000 per day; a 25-cent-per-donut tax, which would decrease donut sales by 100,000 per day; and a 50-cent-per-donut tax, which would decrease donut sales by 150,000 donuts per day. What would be the deadweight loss generated by each tax respectively?

$5,000, $12,500, $37,500

Let's measure consumer surplus if the government imposes price controls and goods end up being randomly allocated among those consumers willing to pay the controlled price. If the demand and supply curves are as in the figure below, then what is consumer surplus under the price control?

$50,000

Michael is an economist. He loves being an economist so much that he would do it for a living even if he only earned $30,000 per year. Instead, he earns $80,000 per year. (Note: This is the average salary of new economists with a PhD degree.) How much producer surplus does Michael enjoy?

$50,000

Suppose your state government has decided to tax donuts. Currently, in your state, 300,000 donuts are sold every day. Three possible taxes are being considered by lawmakers: a 20-cent-per-donut tax, which would decrease donut sales by 50,000 per day; a 25-cent-per-donut tax, which would decrease donut sales by 100,000 per day; and a 50-cent-per-donut tax, which would decrease donut sales by 150,000 donuts per day. What would be the amount of tax revenue generated by each tax respectively?

$50,000, $50,000, and $75,000

$55

$75

$99,990

If the price for a 50-inch plasma TV is $2,010 and Newhart is willing to pay $3,000, what is Newhart's consumer surplus?

$990

Enrollments at Upper Tennessee State University fell from 40,000 to 39,000 as a result of a tuition increase from $6,000 to $9,000. Using the midpoint method, the elasticity of demand is:

-0.06.

The price of a round-trip ticket from New York to San Francisco increased from $500 to $1,000. As a result, the number of tickets sold each week fell from 10,000 to 9,000. Using the midpoint method, the elasticity of demand is:

-0.16.

The price of a movie ticket in Denver, Colorado, rose from $6 to $10. When this happened, the quantity of tickets sold per day fell from 50,000 to 40,000. Using the midpoint method, the elasticity of demand is:

-0.44.

The price of milk at Loma Vista Elementary School rose from $1 to $1.50. As a result, the quantity of milk sold each week fell from 1,000 to 800. Using the midpoint method, the elasticity of demand is:

-0.56.

The Department of Energy's Energy Information Service (EIS) predicts that production from The Arctic National Wildlife Refuge (ANWR) will average about 800,000 barrels per day, or about 1% of worldwide oil production. The elasticity of demand for oil is about 0.5 and the best estimate of the elasticity of supply is about 0.3. Given this information, what will be the percentage increase in quantity demanded of oil if ANWR raises supply by 1%?

0.625%

Some policymakers and environmental scientists would like to see the United States cut back on its use of oil in the long run. If the long-run elasticity of demand for oil in the United States is -0.5, estimate how much would the price of oil have to permanently rise in order to cut oil consumption by 50%?

100%

The figure below shows a tariff on sugar that is lower than the one we discussed in the chapter, so some sugar is imported even after the tariff.What quantity of sugar will be bought and sold in domestic markets at the tariff equilibrium?

21 billion pounds

The figure below shows a tariff on sugar that is lower than the one we discussed in the chapter, so some sugar is imported even after the tariff. What quantity of sugar will be bought and sold in domestic markets at the free-trade equilibrium?

24 billion pounds

Consider the following supply curve for oil. Note that MBD stands for "millions of barrels per day," which is how the supply of oil is usually measured. If the price of a barrel of oil was $15, how much oil would oil suppliers be willing to supply?

25 MBD

Consider the following supply curve for oil. Note that MBD stands for "millions of barrels per day," which is how the supply of oil is usually measured. Based on the supply curve above, what quantity of oil would be supplied at a price of $20?

30 MBD

By how much did national output fall during the Great Depression?

30%

The long-run elasticity of demand for oil in the United States is -0.5. If the price of oil rises by 10%, by how much will the quantity of oil demanded fall?

Consider the following demand curve for oil. Note that MBD stands for "millions of barrels per day," which is how the quantity of oil is usually measured. If the price of oil per barrel is $10, how much oil will be demanded each day?

55 MBD

Katie works at a customer service center, and every hour she has a choice between two activities: answering 200 telephone calls per hour or responding to 400 e-mails per hour. What is the opportunity cost of responding to 400 phone calls?

800 e-mails

Palm Springs, California, was once the playground of the rich and famous—for example, the town has a Frank Sinatra Drive, a Bob Hope Drive, and a Bing Crosby Drive. The city once had a law against building any structure that could cast a shadow on anyone else's property between 9 AM and 3 PM (Source: Armen Alchian and William Allen. 1964. University Economics, Belmont, CA: Wadsworth). What are some alternatives to this command and control solution?

All of the answers are correct.

Economists have found that increasing the proportion of girls in primary and secondary school leads to significant improvement in students' cognitive outcomes (Lavy and Schlosser [2007]. "Mechanisms and impacts of gender peer effects at school." NBER Working Paper 13292). One key reason seems to be that on average boys create more trouble in class, which makes it harder for everyone to learn. Economists would say that "boys are a tax on every child's education." Just based on this study, if you are a parent of a boy, would you rather your son be in a class with mostly boys or mostly girls? What if you are the parent of a girl?

All parents would prefer their children to be placed in classes with mostly girls.

Suppose LightBright and Bulbs4You were the only two suppliers of 60-watt light bulbs in Springfield and that they had the following supply schedules. The market supply curve for the 60-watt light bulb industry in Springfield will include which of the following points?

All the points given would be included in the market supply curve for light bulbs.

Andy enters into a futures contract, allowing him to sell 5,000 troy ounces of gold at $1,000 per ounce in 36 months. After that time passes, the market price of gold is $950 per troy ounce. How much does Andy make or lose?

Andy makes $250,000.

The U.S. Department of Agriculture (USDA) has been concerned that Americans aren't eating enough fruits and vegetables, and they've considered coupons and other subsidies to encourage people—especially lower-income people—to eat these healthier foods. To determine whether such programs are worthwhile, the USDA hired economists to determine the elasticities of demand of some popular fruits. Using the table of these demand elasticity estimates below, determine which fruit exhibits the most inelastic demand? Which exhibits the most elastic demand?

Apples are the most inelastic and oranges are the most elastic

The figure below shows a tariff on sugar that is lower than the one we discussed in the chapter, so some sugar is imported even after the tariff.Suppose that, instead of a tariff, the U.S. government used a quota that forbids imports of sugar greater than 6 billion pounds. Under this quota system what does area D represent? Would importers of sugar prefer a tariff or a quota?

Area D represents extra profits for sugar importers who prefer the quota to the tariff.

In the figure below, what is the buyer's willingness to pay for sugar when the quantity is 20 pounds? Is the combination of $20 per pound and a quantity of 20 pounds an equilibrium?

At a quantity of 20, the buyer is willing to pay $45 per pound. Because of this, the combination of a price of $20 and quantity of 20 is not an equilibrium.

Why does the chapter say that elasticity = escape?

Because those with high elasticities can easily escape to another market, either as a supplier or demander.

If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would you expect to happen to the quality of bread?

Bread quality will fall.

If a subsidy of $5 were imposed on the market shown in the diagram below (where the equilibrium price before the tax is $5.50 and the equilibrium quantity before the tax is 5.5), what price would buyers pay and what price would suppliers receive?

Buyers would pay $2.00 and sellers would receive $7.00.

If a tax of $2 were imposed on the market shown in the diagram below (where the equilibrium price before the tax is $5.50 and the equilibrium quantity before the tax is 5.5), what price would buyers pay and what price would suppliers receive?

Buyers would pay $7.00 and sellers would receive $5.00.

Of the three conditions that explain why a free market is efficient (from Chapter 4), which condition or conditions cease to hold in the case of a tariff on imported goods? Which condition or conditions continue to hold even in the case of a tariff on imports? The conditions are:1. The supply of goods is bought by the buyers with the highest willingness to pay.2. The supply of goods is sold by the sellers with the lowest costs.3. Between buyers and sellers, there are no unexploited gains from trade or any wasteful trades.

Conditions 2 and 3 cease to hold, but condition 1 continues to hold with a tariff.

In the late 1990s, the town of Santa Monica, California, made it illegal for banks to charge people ATM fees. As you probably know, it's almost always free to use your own bank's ATMs, but there's usually a fee charged when you use another bank's ATM. (Source: "The War on ATM Fees," Time, November 29, 1999.) As soon as Santa Monica passed this law, Bank of America stopped allowing customers from other banks to use their ATMs. In bank jargon, Bank of America banned "out-of-network" ATM use.In fact, this ban only lasted for a few days, after which a judge allowed banks to continue to charge fees while awaiting a full court hearing on the issue. Eventually, the court declared the fee ban illegal under federal law. But let's imagine the effect of a full ban on out-of-network fees. What is the amount of producer and consumer surplus in the out-of-network ATM market in Santa Monica after the ban?

Consumer surplus is $0 and producer surplus is $0.

Consider the figure above. In this market, supply is more elastic, and thus more flexible, in the long run. In other words, in the long run, landlords and homebuilders can find something else to do for a living. In a price-controlled market like this one, when will consumer surplus be larger: in the short run or in the long run? Do rent controls hurt landlords and homebuilders more in the short run or in the long run?

Consumer surplus is larger and rent controls hurt producers more in the short run.

If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would happen to consumer surplus if people must wait in line to get bread at the controlled price?

Consumer surplus will fall.

If the price of margarine decreases, what happens to the demand for butter? What happens to the equilibrium quantity and price for butter?

Demand for butter decreases and the equilibrium price and quantity of butter decrease.

Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food. What needs to be TRUE for the tax to actually deter the most people from eating junk food?

Demand for junk food must be elastic.

Another way governments have tried to collect taxes from the wealthy is through the use of luxury taxes, which are exactly what they sound like: taxes on goods that are considered luxuries, like jewelry or expensive cars and real estate. What is TRUE about the demand for luxuries? Consider jewelry. Is a luxury tax on jewelry more likely to hurt the buyers of jewelry or the sellers of jewelry?

Demand for luxuries is relatively elastic. A luxury tax is more likely to hurt the sellers of jewelry.

What should happen to the demand for speed (measured by the average speed on highways) once airbags are included on cars?

Demand for speed will rise because people feel they would be safer if an accident occurs.

Decades ago, Washington, DC, a fairly small city (in geographic area), wanted to raise more revenue by increasing the gas tax. Washington, DC, shares borders with Maryland and Virginia, and it's very easy to cross the borders between these states without even really noticing; the suburbs seem to blend together. How elastic is the demand for gasoline sold at stations within Washington, DC? When the price of gas in Washington, DC, rose, while the prices in Maryland and Virginia stayed the same, what happened to gasoline sales at Washington, DC, stations?

Demand is elastic and sales of gasoline in Washington, DC, fell a lot.

If everyone believes that the price of tomatoes will increase next week, what is likely to happen to demand for tomatoes today?

Demand will increase as people buy more tomatoes now, hoping to beat the price rise.

Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing. This new device, about the size of a washing machine, can bleach, reweave, and re-dye cotton fabric to closely resemble any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour. If you think of the "market for clothing" as "the market for new clothing," does this new invention shift the demand curve or the supply curve, and in which direction?

Demand will shift left.

In 1980, University of Maryland economist Julian Simon bet Stanford entomologist Paul Ehrlich that the price of any five metals of Ehrlich's choosing would fall over 10 years. Ehrlich believed that resources would become scarcer over time as population grew, while Simon believed that people would find good substitutes. The price of all five metals that Ehrlich chose (nickel, tin, tungsten, chromium, and copper) fell over the next 10 years and Simon won the bet. Ehrlich, an honorable man, sent a check in the appropriate amount to Simon. Changes in either supply or demand could have pushed these prices down. How would demand have needed to change if it had been the cause of the price change? What about supply?

Demand would have needed to decrease. Supply would have needed to increase.

Which country shows specialization in knowledge and as a result would have more knowledge: Utopia, where in the words of Karl Marx, each person knows just enough about hunting, fishing, and cattle raising to "hunt in the morning, fish in the afternoon, [and] rear cattle in the evening," or Drudgia, where one-third of the population learns only about hunting, one-third only about fishing, and one-third only about cattle raising?

Drudgia, because specialization allows for more productivity

Consider the productivity table below. Who has comparative advantage in making taurons?

Ducennia

Economics is sometimes called "the dismal science." Of the following big ideas in Chapter 1, which one sounds dismal—like bad news?

Economic Booms and Busts Cannot Be Avoided but can Be Moderated

When someone is sick, the patient's decision to take an antibiotic imposes costs on others—it helps bacteria evolve resistance faster. But it also gives free benefits to others: It may slow down the spread of infectious disease the same way that vaccinations do. Thus, antibiotics can create external costs as well as external benefits. In theory, these could cancel each other out, so that just the right amount of antibiotics is being used. But economists think that on balance, there is overuse of antibiotics, not underuse. Why? (Hint: Think on the margin!)

Economists believe that the marginal social cost of using antibiotics is greater than the marginal social benefit of using antibiotics.

A government is torn between auctioning annual pollution allowances and setting an annual pollution tax. Unlike in the messy real world, this government is quite certain that it can achieve the same price and quantity either way. If the government wants to choose the method that will pull in more government tax revenue, which method should it choose?

Either of these methods would generate the same revenue.

The market for sugar is diagrammed below:What if a new study was published that emphasized the negative health effects of consuming sugar?

Equilibrium price and quantity would both fall.

When demand decreases what happens to price and quantity in equilibrium?

Equilibrium price decreases and equilibrium quantity decreases.

When supply increases what happens to price and quantity in equilibrium?

Equilibrium price decreases and equilibrium quantity increases.

When supply decreases what happens to price and quantity in equilibrium?

Equilibrium price increases and equilibrium quantity decreases.

When demand increases what happens to price and quantity in equilibrium?

Equilibrium price increases and equilibrium quantity increases.

The market for sugar is diagrammed below:What would happen to the equilibrium quantity and price if the wages of sugar cane harvesters increased?

Equilibrium price would rise and equilibrium quantity would fall.

The government decides that it wants to increase the quantity of solar panels in use, so it offers a $20 subsidy per panel to producers. What happens to the supply curve of solar panels?

For each quantity along the supply curve, the price will shift down by $20.

France has the largest long-run elasticity of oil demand (-0.6) of any of the large, rich countries. What does this say about France's ability to respond to long-run price changes compared with other rich countries?

France is more responsive to changes in oil prices.

Economists have found that increasing the proportion of girls in primary and secondary school leads to significant improvement in students' cognitive outcomes (Lavy and Schlosser [2007]. "Mechanisms and impacts of gender peer effects at school." NBER Working Paper 13292). One key reason seems to be that boys create more trouble in class, on average, which makes it harder for everyone to learn. Economists would say that "Boys are a tax on every child's education." Do girls in a classroom provide positive or negative externalities? What about boys?

Girls provide positive externalities and boys provide negative externalities.

In New York City, some apartments are under strict rent control, while others are not. This is a theme in many novels and movies about New York, including Bonfire of the Vanities and When Harry Met Sally. One predictable side effect of rent control is the creation of a black market. Let's think about whether it's a good idea to allow this black market to exist. Harry is lucky enough to get a rent-controlled apartment for $300 per month. The market rent on such an apartment is $3,000 per month. Harry himself values the apartment at $2,000 per month, and he'd be quite happy with a regular, $2,000-per-month New York apartment. If Harry illegally subleases his apartment to Sally on the black market for $2,500 per month and instead rents a $2,000 apartment, is he better off or worse off than if he obeyed the law? By how much?

He would be $500 better off.

Labor unions are some of the strongest proponents of the minimum wage. Yet in 2008, the median full-time union member earned $886 per week, an average of more than $22 per hour. Therefore, a rise in the minimum wage doesn't directly raise the wage of many union workers. So why do unions support minimum wage laws?

High-skilled workers and low-skilled workers are substitutes. Thus, if the wages of low-skilled workers rise, the demand for high-skilled workers will go up and the wages of high-skilled workers will go up.

Conan O'Brien has been a talk show host since 1993, but he began his career in comedy as a writer: first at The Harvard Lampoon while in college, then eventually at Saturday Night Live and The Simpsons. Given that he is such an accomplished comedy writer, it might be surprising to learn that his current talk show staff includes more than a dozen writers. How can you explain this using the information covered in the chapter?

His writers have a lower opportunity cost of comedic writing than Conan.

The U.S. government has many subsidies for alternative energy development: Some are just called subsidies; some are called tax breaks. Either way, they work just like the subsidies we studied in this chapter. The market for windmills could be represented by one of the two graphs below. How would you describe the supply and demand curves in these markets?

In the first market, supply is relatively elastic and demand is relatively inelastic. In the second market, supply is relatively inelastic and demand is relatively elastic.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the market for snow shovels?

It causes an increase in demand for snow shovels.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the supply side of the market for snow shovels?

It causes an increase in the quantity supplied of snow shovels.

When the price of Apple computers declines, what probably happens to the demand for Windows-based computers?

It decreases, because Apple computers and Windows-based computers are substitutes.

If the price of oil falls, what will happen to the quantity of oil supplied?

It decreases, because some oil deposits are no longer worth tapping.

Olive oil and corn oil are very often considered to be substitute products. When the price of olive oil increases, what probably happens to the demand for corn oil?

It increases, because olive oil and corn oil are substitutes.

Let's apply the economics of taxation to romantic relationships. What does it mean to have an inelastic demand for your boyfriend or girlfriend?

It means that you cannot live without him or her.

When the market price of a good is above the equilibrium price, what does greed (in other words, self-interest) on the part of sellers tend to do to the price?

It pushes the price down.

Nobel Prize-winner Milton Friedman said that a bad central banker is like a "fool in the shower." In a shower, of course, when you turn the faucet to change the temperature of the water, there won't be an actual change in the temperature for a few seconds. So if a "fool in the shower" is always making big changes in the temperature based on how the water feels right now, the water is likely to swing back and forth between too hot and too cold. How does this apply to central banking?

It takes a fairly long time for central bank decisions to trickle through the economy.

In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour. Where will it be easier to find parking: in Freedonia or Meterville? Which town will attract shoppers with higher incomes?

It will be easier to find parking in Meterville and Meterville will attract higher-income shoppers.

If junk food supply is highly elastic—perhaps because it's not that hard to start selling salads with low-fat dressing instead of burgers smothered in mayonnaise and cheese—what does that mean for the impact of a junk food tax?

It will be more effective than if supply were inelastic.

If a government decides to make health insurance affordable by requiring all health insurance companies to cut their prices by 30%, what will probably happen to the number of people covered by health insurance?

It will go down because insurance companies will only sell insurance to healthy people now that the rates are set at lower levels. The quantity of coverage supplied will decrease.

What is the impact of an economic boom on the elasticity of demand for new televisions?

It would decrease the elasticity of demand for new televisions, as consumers would now be less reactive to changes in the price of new televisions.

A public awareness campaign spreads a wider understanding that bacteria and other organisms cause and spread disease. How does this affect the elasticity of demand for soap?

It would decrease the elasticity of demand for soap, as consumers would now be less reactive to changes in the price of soap.

How would new regulations banning the use of pesticides and fertilizers affect the elasticity of supply for food?

It would decrease the elasticity of supply, as producers would now find it more difficult to expand the amount they grow on their land when the price goes up.

During the Middle Ages, the African city of Taghaza quarried salt in 200-pound blocks to be sent to the salt market in Timbuktu, in present-day Mali. Travelers report that Taghazans used salt instead of wood to construct buildings. How would the elasticity of demand for wood in Taghaza have compared with the elasticity of demand for wood in other towns without big salt mines?

It would have been more elastic.

How would the increasing prevalence of telecommuting affect the elasticity of demand for cars?

It would increase the elasticity of demand for cars, as consumers would now be more reactive to changes in the price of cars.

How would the invention of nuclear power plants affect the elasticity of demand for coal?

It would increase the elasticity of demand for coal, as consumers would now be more reactive to changes in the price of coal.

How would a new process for manufacturing diamonds affect the elasticity of supply for diamonds?

It would increase the elasticity of supply, as manufactured goods are more reactive to price changes than natural resources.

How would the fact that a very large share of oil output was used to make plastic affect the elasticity of the supply curve for plastic?

It would result in a less elastic supply, as goods that use a large share of the market for inputs tend to be less reactive to changes in their own price.

The Japanese people currently pay about four times the world price for rice. If Japan removed its trade barriers so that Japanese consumers could buy rice at the world price, who would be better off and who would be worse off?

Japanese consumers would be better off and Japanese rice farmers would be worse off.

Japanese farmers would lobby harder, since their losses are concentrated in a smaller group than the gains to consumers.

In 30 minutes, Kara can either make miso soup or she can clean the kitchen. In 14 minutes Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen. Who has the comparative advantage in cleaning the kitchen?

Kara has the comparative advantage in cleaning the kitchen.

Maxicon is opening a new coal-fired power plant, but the government wants to keep pollution down. Which is a more efficient way to reduce pollution: requiring Maxicon to use one particular air-scrubbing technology that will reduce pollution by 25% or commanding Maxicon to reduce pollution by 25% in any way they can?

Mandating the pollution reduction only will be more efficient, since Maxicon will be better equipped to find lower cost ways of performing the reduction.

Consider the productivity table below. Who has absolute advantage in making rotids?

Mandovia

Consider the productivity table below. Who has absolute advantage in making taurons?

Mandovia

Consider the productivity table below. Who has comparative advantage in making rotids?

Mandovia

In 30 minutes, Kara can either make miso soup or clean the kitchen. In 14 minutes Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen. Who has the comparative advantage in making miso soup?

Mitchell has the comparative advantage in making miso soup.

Suppose the elasticity of demand for ballpoint pens with blue ink is -20. What do you suppose explains why demand for this good is so elastic?

Most people view blue-ink pens and black-ink pens as very close substitutes.

Let's connect Big Ideas Six and Nine: Do you think that people in poor countries are poor because they don't have enough money? In other words, could a country get richer by printing more pieces of paper called "money" and handing those out to its citizens?

No, both because printing lots of paper money will simply cause inflation, and because wealth does not originate in the supply of paper money.

Suppose you decide to follow in Vernon Smith's footsteps and conduct your own experiment with your friends. You give out 10 cards, five cards to buyers with the figures for willingness to pay of $1, $2, $3, $4, and $5, and five cards to sellers with the amounts for costs of $1, $2, $3, $4, and $5. The rules are the same as Vernon Smith implemented. Assuming the market works as predicted and moves to equilibrium, will the buyer who values the good at $1 be able to purchase? Why or why not?

No, in equilibrium the price will be higher than this buyer is willing to pay so they won't get the good.

Carbon dioxide is a byproduct of the burning of fossil fuels, something necessary for many modes of transportation and manufacturing processes. It has been asserted by scientists that carbon dioxide is the cause of global warming, which imposes negative externalities on the entire world population. Considering what we've learned about externalities, should human-caused global warming be completely stopped? What is the optimal level of human-made carbon dioxide, compared with the current level?

No, we shouldn't eliminate the entire externality, but the optimal level of human-made carbon dioxide is likely less than today's amount.

Part of the reason the Great Depression was so destructive was that economists didn't understand how to use government policy very well in the 1930s. Does this mean that we should lose confidence about the know-how of economists?

No. Economics is not a perfect science, since there are so many variables. Furthermore, economic conditions are continuously changing. Today, the tools of monetary and fiscal policies are better understood to reduce swings in unemployment and GDP.

India subsidizes its steel industry. This allows for India's steel to be produced cheaper than U.S. steel. U.S. steel producers want to restrict imported steel from India. Is this a good reason to place tariffs on Indian steel?

No. Even though a tariff on Indian steel would create jobs in the U.S. steel industry, it would cause the price of steel to increase leading to less production and the loss of additional jobs in other fields.

If a corrupt government grants Maxicon, the operator of a new coal-fired power plant, all of the (tradable) pollution permits in the entire nation (even though there are many energy companies), does this guarantee that Maxicon will engage in an enormous amount of pollution? Why or why not?

No. If the permits are tradable, Maxicon may reduce its pollution and sell many of the permits.

The U.S. government has many subsidies for alternative energy development: Some are called subsidies; some are called tax breaks. Either way, they work just like the subsidies we studied in this chapter. When Congress gives subsidies for the alternative energy market, they are hoping that a small subsidy can get a big increase in output. In other words, they are hoping that the equilibrium quantity will be elastic. At the same time, the groups most likely to lobby Congress for a big alternative energy subsidy are the groups that get the most extra surplus from it. After all, if the subsidy doesn't give them much surplus they're not likely to ask for it. So, here's the big question: Will the groups that are most likely to lobby for a subsidy be the same groups that are mostly likely to respond to the subsidy?

No. The inelastic group is likely to lobby for a subsidy, while the elastic group is most likely to respond to a subsidy.

In Chapter 6 we said that taxes create deadweight losses. When we tax goods with negative externalities should we worry about deadweight losses? Why or why not?

No. When the government taxes a good with a negative externality, it will remove the deadweight loss generated by the externality.

Some people worry that machines will take jobs away from people, making people permanently unemployed. In the United States, only 150 years ago most people were farmers. Now, machines do almost all of the farm work and fewer than 2% of Americans are farmers, yet that 2% produce enough food to feed the entire country while still exporting food overseas. What happened to all of those people who used to work on farms?

Now that our food can be produced by such a small group of workers, most Americans have moved on to work in other sectors of the economy.

Consider the following supply and demand tables for bread. What is the equilibrium price (P) and quantity (Q)?

P = $2; Q = 35

The following table shows the supply and demand schedules for Good X. What is the equilibrium price (P) and quantity (Q) for this good?

P = $32; Q = 150

Suppose the market for batteries looks like the following diagram:What is the equilibrium price (P) and quantity (Q)?

P = $4; Q = 20

Some people with diabetes absolutely need to take insulin on a regular basis to survive. At the same time, pharmaceutical companies that make insulin could find a lot of other ways to make some money. If the U.S. government imposes a tax on insulin producers of $10 per cubic centimeter of insulin, who will bear most of the burden of the tax?

People with diabetes will bear most of the burden.

Some people with diabetes absolutely need to take insulin on a regular basis to survive. At the same time, pharmaceutical companies that make insulin could find a lot of other ways to make some money. Suppose that insulin manufacturers convince the U.S. government to pay a subsidy to insulin makers of $10 per cubic centimeter of insulin. Who will get most of the benefit of this subsidy: insulin producers or people with diabetes?

People with diabetes will receive most of the benefit.

The supply and demand for copper change constantly. New sources of copper are discovered, mines collapse, workers go on strike, products that use copper wax and wane in popularity, weather affects shipping conditions, and so on. Suppose you learned that growing political instability in Chile (the largest producer of copper) would greatly reduce the productivity of its mines in two years. How will this affect the price of copper in two years? Given this future change in price, would a reasonable person buy copper to store for later? (Ignore storage costs.)

Price will increase, so a reasonable person should buy copper today.

Economists often say that prices are a "rationing mechanism." If the supply of a good decreases, how do prices "ration" these now-scarce goods in a competitive market?

Prices allocate goods to the people with the highest willingness to pay.

When supply falls, what happens to quantity demanded in equilibrium?

Quantity demanded decreases.

Which of the following best describes when a price ceiling is effective in keeping the actual market price below the equilibrium market price?

Quantity supplied is less than quantity demanded.

Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing. This new device, about the size of a washing machine, can bleach, reweave, and re-dye cotton fabric to closely resemble any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour. After this invention, will society's scarce productive resources (machines, workers, retail space) flow toward the "new clothing" sector or away from it?

Resources will flow away from the production of new clothing.

How do specialization and trade help you to avoid boredom and ignorance?

Specialization allows people to focus on one thing, thus learning more about it, than if they had to learn a little about everything, alleviating ignorance; trade introduces us to new items to prevent boredom.

Suppose that drug addicts pay for their addiction by stealing. Therefore, the higher the total revenue of the illegal drug industry, the higher the amount of theft. If a government crackdown on drug suppliers leads to a higher price of drugs, what will happen to the amount of stealing if the demand for drugs is elastic?

Stealing will decrease.

Stealing will increase.

In the months before the 1990-1991 Persian Gulf War, speculators drove up the price of oil. The average price in October 1990 was $36 per barrel, more than double the price in 1988. Oil speculators, like many people around the world, expected the Gulf War to last for months, disrupting the oil supply throughout the Gulf region. Thus, speculators either bought oil on the open market (almost always at the high speculative price) or they already owned oil and just kept it in storage. Either way, their plan was the same: to sell it in the future, when prices might even be higher.As it turned out, the war was swift: After one month of massive aerial bombardment of Iraqi troops and a 100-hour ground war, President George H.W. Bush declared a cessation of hostilities. Despite the fact that Saddam Hussein set fire to many of Kuwait's oil fields, the price of oil plummeted to about $20 per barrel, a price at which it remained for years. When the speculators sold their stored oil in the months after the war, how did this massive resale affect the oil market?

Supply increased and the price of oil fell.

Imagine that a technological innovation reduces the costs of producing high-quality steel. What happens to the supply curve for steel?

Supply increases and the supply curve shifts down and to the right.

If oil executives read in the newspaper that new solar-power technologies have been discovered, but that these technologies won't become useful for another 10 years, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today?

Supply will increase, equilibrium price will decrease, and equilibrium quantity will increase.

If oil executives read in the newspaper that massive new oil supplies have been discovered under the Pacific Ocean, but that these supplies won't be useful until 10 years from now, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today?

Supply will increase, price will decrease, and quantity will increase.

The supply and demand for copper change constantly. New sources of copper are discovered, mines collapse, workers go on strike, products that use copper wax and wane in popularity, weather affects shipping conditions, and so on. Suppose you learned that growing political instability in Chile (the world's largest producer of copper) would greatly reduce the productivity of its mines in two years. Ignoring all other factors, which curve (supply or demand) will shift in which direction (left or right) in the market for copper two years from now?

Supply will shift left.

Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing. This new device, about the size of a washing machine, can bleach, reweave, and re-dye cotton fabric to closely resemble any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour. If you think of the "market for clothing" as "the market for clothing, both new and used," does this shift the demand curve or the supply curve, and in which direction?

Supply will shift right.

Consider the following supply and demand tables for bread. How would the supply and demand curves for this market look?

Supply would be upward sloping and demand would be downward sloping.

In which of the following cases are the Coase theorem's assumptions likely to be TRUE? In other words, when will the parties be likely to strike an efficient bargain? Case 1: My neighbor wants me to cut down an ugly shrub in my front yard. The ugly shrub, of course, imposes a negative externality on him and on his property value.Case 2: My neighbors all would love for me to get that broken-down Willys Jeep off my front lawn. It's been years now, after all. And would it be too much for me to paint the house and fill up that 6-foot ditch in the front yard? The whole neighborhood is annoyed.Case 3: A coal-fired electricity plant dumps its leftover hot water into the nearby lake, killing all the fish. Thousands of homes line the banks of the lake.Case 4: A coal-fired electricity plant dumps its leftover hot water into the nearby river, killing all the fish for a mile downstream. There is one large privately owned fishery one-mile downstream affected by this. After that, the water cools enough so it's not a problem.

The Coase theorem's assumptions would hold in cases 1 and 4, but not in cases 2 and 3.

According to The Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high-tech developed countries of East Asia, North America, and Western Europe, while "South" is shorthand for the rest of the world. Using the information in the productivity table below, who has the comparative advantage in making high-quality cars?

The North has the comparative advantage in high-quality cars.

If a subsidy of $5 were imposed on the market shown in the diagram below (where the equilibrium price before the tax is $5.50 and the equilibrium quantity before the tax is 5.5), how much would the subsidy cost the government? How much deadweight loss would be created by the subsidy?

The cost to the government would be $45 and the deadweight loss would be $8.75.

The supply and demand for copper change constantly. New sources of copper are discovered, mines collapse, workers go on strike, products that use copper wax and wane in popularity, weather affects shipping conditions, and so on. Suppose you learned that growing political instability in Chile (the largest producer of copper) would greatly reduce the productivity of its mines in two years. What happens to the current price of copper? Will people use more or less copper today?

The current price of copper will rise and people will use less today.

Cars and gasoline are complements. What will happen to the demand curve for gasoline if the price of cars decreases?

The demand curve for gasoline will shift upward and to the right.

In comparing the demand for Exxon gasoline at the corner of 7th and Grand with the demand for gasoline in the entire city, which of the following statements is TRUE?

The demand for Exxon gasoline at the corner of 7th and Grand is more elastic than the demand for gasoline in the entire city, as consumers are less reactive to changes in the price of gasoline in the entire city.

Think about two products, "safe cars" (a heavy car such as a BMW 530xi with infrared night vision, four-wheel antilock brakes, and electronic stability control), and "dangerous cars" (a lightweight car without much in the way of safety features). If new research makes it easier to produce safe cars and the price of safe cars falls, how does this affect the market for dangerous cars?

The demand for dangerous cars will decrease.

In comparing the demand for insulin with the demand for vitamins over the next decade, which of the following statements is TRUE?

The demand for insulin is less elastic than the demand for vitamins over the next decade because consumers are more reactive to changes in the price of vitamins.

In comparing the demand for tangerines with the demand for all fruit, which of the following statements is TRUE?

The demand for tangerines is more elastic than the demand for fruit because consumers are more reactive to changes in the price of tangerines.

In comparing the demand for beef next month with the demand for beef over the next decade, which of the following statements is TRUE?

The demand next month is less elastic than the demand over the next decade because consumers are more reactive to changes in the price over the next decade.

Suppose that wages for nurses are increasing. How would this affect the elasticity of supply for nurses over a period of several years as compared with the elasticity of supply over the next month?

The elasticity of supply would be larger over a period of several years because the supply will be more reactive to changes in wages over the long run.

In recent years, there have been news reports that toys made in China are unsafe. When those news reports show up on CNN and Fox News, what probably happens to the equilibrium price and quantity of toys made in China? Are Chinese toymakers made better or worse off by such news?

The equilibrium price and quantity of toys falls and Chinese toymakers are worse off.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the equilibrium price and quantity of snow shovels?

The equilibrium price and quantity would both rise.

A flu shot typically costs between $25 and $50, but some firms offer their employees free flu shots. Why might a firm prefer to offer its employees free flu shots if the alternative is an equally costly wage increase?

The firm wants to encourage employees to get flu shots because they want to avoid a loss of productivity because of days lost to illness, and because they have positive externalities on those around them (other employees).

Fires create external costs because they spread from one building to another. If the government wants to reduce the external costs of fires, should it encourage subsidies for sprinkler systems or should they just mandate that everyone have sprinklers?

The government should subsidize sprinkler systems.

When government is trying to raise tax revenue, it sometimes attempts to target higher-income people because they are in a better position to bear the burden of a tax. However, it can be very difficult to earn tax revenue from wealthy people.Consider the progressive nature of the U.S. federal income tax system: It's designed so that higher incomes are taxed at higher tax rates. Thinking about the elasticity of labor supply, why might it be more difficult to collect tax revenue from a wealthy individual than from a poor person, all else equal?

The labor supply curve for a wealthy individual may be more elastic than a poor person's labor supply curve.

Is the minimum wage a "price ceiling" or a "price floor?" What about rent control?

The minimum wage is a price floor, while rent control is a price ceiling.

Let's apply the economics of taxation to romantic relationships. Sometimes relationships have taxes. Suppose that you and your boyfriend or girlfriend live one hour apart. Using the tools developed in the chapter, how can you predict which one of you will do most of the driving? That is, which one of you will bear the majority of the relationship tax?

The one with more inelastic demand will do most of the driving.

Consider farmers who have land that is suitable for growing both wheat and soybeans. Suppose all farmers are currently farming wheat, but the price of soybeans rises dramatically. How does this affect the opportunity cost of producing wheat?

The opportunity cost of wheat production increases.

Suppose you are bidding on a used car. Someone else bids above the highest amount that you are willing to pay. What can you say for sure about that person's monetary value of the car compared with yours?

The other person values the car more than you.

In recent years, the Paleo diet, which emphasizes eating more meat and fewer grains, became very popular. What do you suppose that did to the price and quantity of bread?

The price and quantity of bread fell.

The book describes Vernon Smith's experiment with supply and demand models. What happened in Vernon Smith's lab?

The price and quantity were close to equilibrium and gains from trade were close to the maximum.

In rich countries, governments almost always set the fares for taxi rides. The prices for taxi rides are the same in safe neighborhoods and in dangerous neighborhoods. Because of this, it is generally easier to find a cab in safe neighborhoods. If these taxi price controls were ended, what would probably happen to the price and quantity of cab rides in dangerous neighborhoods?

The price and quantity would both rise.

If the elasticity of demand for spring break packages to Cancun is -5, and if you notice that this year in Cancun the quantity of packages demanded increased by 10%, then what happened to the price of Cancun vacation packages?

The price of Cancun vacations packages fell by 2%.

Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, a wise, benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. Let's see if the forces of the market can be as efficient as a benevolent dictator. As laptops become easier to build, the supply of laptops increases. How does this affect the price of laptops? How does it affect the demand for desktop computers (a substitute for laptops)?

The price of laptops fell and the demand for desktops fell.

Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing. This new device, about the size of a washing machine, can bleach, reweave, and re-dye cotton fabric to closely resemble any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour. What will this new invention do to the price of new, not recycled, clothing?

The price of new clothing will fall.

When the United States had price controls on oil and gasoline, some parts of the United States had plenty of heating oil while other states had long lines for heating oil. As in the chapter, let's assume that winter oil demand is higher in New Jersey than in California. If there had been no price controls, what would have happened to the prices of heating oil in New Jersey and in California? And how would "greedy businesspeople" have responded to these price differences?

The price of oil would have been higher in New Jersey and producers would have responded by sending more oil to New Jersey.

The supply curve for rice in Japan slopes upward, just like any normal supply curve. If Japan eliminated its trade barriers to rice, what would happen to the price of rice? What about the number of workers employed in the rice-producing industry in Japan?

The price of rice would fall and the number of workers in the rice industry would fall.

President Jimmy Carter not only deregulated airline prices, he also deregulated much of the trucking industry as well. Trucks carry almost all of the consumer goods that you purchase, so almost every time you purchase something, you're paying money to a trucking company. Based on what happened in the airline industry after prices were deregulated, what do you think happened in the trucking industry after deregulation?

The price of trucking services fell, truckers earned less money, and consumers saved a lot of money.

Figure 9.1 in the book looks at a case in which the world price is below the domestic no-trade price. Let's look at a case in which the world price is above the domestic no-trade price. We'll work with the market for airplanes shown in the figure below.When this economy moves from no trade to free trade, what will happen to the domestic price of airplanes? What about the quantity purchased by domestic companies?

The price will rise and the quantity of airplanes purchased by domestic companies will fall.

Suppose you decide to follow in Vernon Smith's footsteps and conduct your own experiment with your friends. You give out 10 cards, five cards to buyers with the figures for willingness to pay of $1, $2, $3, $4, and $5, and five cards to sellers with the amounts for costs of $1, $2, $3, $4, and $5. The rules are the same as Vernon Smith implemented. At a price of $3.50 how many units are demanded? How many units are supplied?

The quantity demanded is 2 and the quantity supplied is 3.

If the elasticity of demand for ballpoint pens with blue ink is -20, and the price of ballpoint pens with blue ink rises by 1%, what happens to the quantity demanded?

The quantity demanded will decrease by 20%.

The quantity supplied by domestic firms is greater than the quantity demanded by domestic consumers.

If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would happen to the quantity supplied of bread?

The quantity supplied will fall.

In the months before the 1990-1991 Persian Gulf War, speculators drove up the price of oil. The average price in October 1990 was $36 per barrel, more than double the price in 1988. Oil speculators, like many people around the world, expected the Gulf War to last for months, disrupting the oil supply throughout the Gulf region. Thus, speculators either bought oil on the open market (almost always at the high speculative price) or they already owned oil and just kept it in storage. Either way, their plan was the same: to sell it in the future, when prices might be even higher. As it turned out, the war was swift: After one month of massive aerial bombardment of Iraqi troops and a 100-hour ground war, President George H.W. Bush declared a cessation of hostilities. Despite the fact that Saddam Hussein set fire to many of Kuwait's oil fields, the price of oil plummeted to about $20 per barrel, a price at which it remained for years. Why did the speculators follow this plan?

The speculators had incorrect expectations about the length of the war and the future of oil prices.

The federal education reform law known as No Child Left Behind requires every state to create standardized tests that measure whether students have mastered key subjects. Since the same test is given to all students in the same grade in the state, this encourages all schools within a state to cover the same material. According to the division of knowledge model (specialization), what are the costs of this approach (or what are the costs from reducing the degree of specialization or division of knowledge)?

The state will be less productive because the children will know a little about of a lot of the same things, and no one will be an expert in anything.

The supply curve shifts up and to the left.

The supply curve will shift up and to the left.

In comparing the supply of apples over the next growing season with the supply of apples over the next decade, which of the following statements is TRUE?

The supply of apples over the next growing season is less elastic than the supply of apples over the next decade because producers are more reactive to changes in the price over the next decade.

In comparing the supply of breakfast cereal with the supply of food, which of the following statements is TRUE?

The supply of breakfast cereal is more elastic than the supply of food.

In comparing the supply of construction workers in Binghamton, New York, with the supply of construction workers in the entire state of New York, which of the following statements is TRUE?

The supply of construction workers in Binghamton, New York, is more elastic than the supply of construction workers in the entire state of New York because supply is more reactive to changes in the price over a smaller geographic area.

In comparing the supply of gold with the supply of computers, which of the following statements is TRUE?

The supply of gold is less elastic than the supply of computers.

The industrial areas in northeast Washington, D.C., were relatively dangerous in the 1980s. Over the last two decades, the area has become a safer place to work (although there are still seven times more violent crimes per person in these areas than in a nearby neighborhood called Georgetown). When an area becomes a safer place to work, what likely happens to the supply of labor in that area?

The supply of labor increases.

Think about two products, "safe cars" (a heavy car such as a BMW 530xi with infrared night vision, four-wheel antilock brakes, and electronic stability control), and "dangerous cars" (a lightweight car without much in the way of safety features). If new research makes it easier to produce safe cars, what happens to the supply of safe cars? What will happen to the equilibrium price of safe cars?

The supply of safe cars will rise and the equilibrium price of safe cars will fall.

If a tax of $2 were imposed on the market shown in the diagram below (where the equilibrium price before the tax is $5.50 and the equilibrium quantity before the tax is 5.5), how much revenue would be raised by the tax? How much deadweight loss would be created by the tax?

The tax revenue would be $8 and the deadweight loss would be $1.50.

This chapter pointed out that trade restrictions on sugar cause U.S. consumers to pay more than twice the going world price for sugar. Why do you think people aren't voicing much concern over this?

The trade restrictions were put in place to save U.S. jobs, so people are less likely to protest.

Suppose you're doing some history research on shoe production in ancient Rome during the reign of the famous Emperor Diocletian. Your records tell you how many shoes were produced each year in the Roman Empire, but it doesn't tell you the price of shoes. You find a document that says that in the year 301, Emperor Diocletian issued an "Edict on Prices," but you don't know whether he imposed price ceilings, price floors, or subsidies—your Latin is a little rusty. However, you can clearly tell from the documents that the number of shoes actually sold in markets fell dramatically, and that both potential shoe sellers and potential shoe buyers were unhappy with the edict. With the information given, can you tell what Diocletian imposed? (Yes, there really was an Edict of Diocletian.)

The type of price control cannot be determined from the information given.

In the 1970s, AirCal and Pacific Southwest Airlines flew only within California. At that time, federal price floors didn't apply to flights within just one state. A major route for these airlines was flying from San Francisco to Los Angeles, a distance of 350 miles. This is about the same distance as from Chicago, Illinois, to Cleveland, Ohio. How do you think meals on AirCal flights compared with those on flights from Chicago to Cleveland?

Their meals would have been worse.

The Canadian government has wage controls for medical doctors. To keep things simple, let's assume that they set one wage for all doctors: $100,000 per year. It takes about six years to become a general practitioner or a pediatrician, but it takes about eight or nine years to become a specialist like a gynecologist, surgeon, or ophthalmologist. (Note: The actual Canadian system allows specialists to earn a bit more than general practitioners, but the difference isn't big enough to matter.) What do you suppose the situation is in the Canadian health system?

There are lots of general practitioners and pediatricians, but few specialists.

In recent years, there have been news reports that toys made in China are unsafe. When those news reports show up on CNN and Fox News, what probably happens in the market for toys made in China?

There is a decrease in market demand.

In the market for really good ideas—ideas that will dramatically change the world for the better—the private benefit of one more really good idea (from speaker's fees, book sales, patents, etc.) is $1,000,000. The marginal social benefit is $100,000,000. Determine whether there is an external cost or external benefit as a result of this situation, the size of that cost or benefit (in dollars), and whether a tax or a subsidy is the best way to compensate for the externality.

There is an external benefit of $99,000,000 per new idea and a subsidy is necessary to compensate for it.

In the market for automobiles, the private benefit of one more small SUV is $20,000 and the social cost of one more small SUV is $30,000. Determine whether there is an external cost or external benefit as a result of this situation, the size of that cost or benefit (in dollars), and whether a tax or a subsidy is the best way to compensate for the externality.

There is an external cost of $10,000 per SUV and a tax would be necessary to compensate for it.

In the market for fashionable clothes, the marginal social benefit of one more dress per person is $100, and the marginal private benefit is $500. Determine whether there is an external cost or external benefit as a result of this situation, the size of that cost or benefit (in dollars), and whether a tax or a subsidy is the best way to compensate for the externality.

There is an external cost of $400 per dress and a tax would be necessary to compensate for it.

What's the best way to think about the rise in oil prices in the 1970s, when wars and oil embargoes wracked the Middle East?

There was a fall in supply and a rise in market demand.

Suppose that the quantity demanded and quantity supplied in the market for milk is as follows:If the government places a price ceiling of $2 on milk, will there be a shortage or surplus of milk? How large will it be? How many gallons of milk will be sold?

There will be a shortage of 2,100; 2,000 units of milk will actually be sold.

The Japanese people currently pay about four times the world price for rice. If Japan removed its trade barriers so that Japanese consumers could buy rice at the world price and we added all the gains and losses to the Japanese, would there be a net gain or net loss?

There would be a net gain.

In 1980, University of Maryland economist Julian Simon bet Stanford entomologist Paul Ehrlich that the price of any five metals of Ehrlich's choosing would fall over 10 years. Ehrlich believed that resources would become scarcer over time as population grew, while Simon believed that people would find good substitutes, putting less pressure on prices. The price of all five metals that Ehrlich chose (nickel, tin, tungsten, chromium, and copper) fell over the next 10 years and Simon won the bet. Ehrlich, an honorable man, sent a check in the appropriate amount to Simon. What does the falling price tell us about the relative scarcity of these metals?

These metals were becoming less scarce.

Ending hyperinflation in an economy is like an obese person trying to lose 100 pounds. Why?

They are both difficult to do and will require lots of sacrifice.

Nobel Prize-winner and New York Times columnist Paul Krugman has noted that economics is a lot like medicine: Knowledge is limited and many cures are quite painful. What are some other ways that economics and medicine are alike?

They are not perfect sciences. You are never 100% sure of the consequences and outcome of a remedy. Medicine is a practice and economics is also a practice.

In the months before the 1990-1991 Persian Gulf War, speculators drove up the price of oil. The average price in October 1990 was $36 per barrel, more than double the price in 1988. Oil speculators, like many people around the world, expected the Gulf War to last for months, disrupting the oil supply throughout the Gulf region. Thus, speculators either bought oil on the open market (almost always at the high speculative price) or they already owned oil and just kept it in storage. Either way, their plan was the same: to sell it in the future, when prices might be even higher. As it turned out, the war was swift: After one month of massive aerial bombardment of Iraqi troops and a 100-hour ground war, President George H. W. Bush declared a cessation of hostilities. Despite the fact that Saddam Hussein set fire to many of Kuwait's oil fields, the price of oil plummeted to about $20 per barrel, a price at which it remained for years. How much profit did speculators earn, or how much money did they lose, on each barrel?

They lost $16 a barrel.

In the text, we discuss sugar farmers in Florida who use unusually large amounts of fertilizer to produce their crops; they do so because their land isn't all that great for sugar production. If we translate this into the language of the supply curve, would these Florida sugar farms be on the lower-left part of a supply curve, or on the upper-right of the supply curve? Why? (Hint: Think in terms of price and opportunity cost. Would using large amounts of fertilizer come at a higher opportunity cost? What price [low or high] would the supplier need to supply at in order to compensate?)

They would be in the upper-right part of the supply curve, because they have very high opportunity cost.

The long-run elasticity of demand for oil in the United States is -0.5. How does a 10% increase in oil prices affect the total revenues to the oil producers?

Total revenues increase.

In the market depicted below there is either a price ceiling or a price floor— surprisingly, it doesn't matter which one it is: Whether it's an $80 price floor or a $30 price ceiling, the chart looks the same. In the chart, there's a rectangle labeled A and a triangle labeled B. Which of the following best describes these two areas?

Triangle B represents value lost from the "deals that don't get made." Rectangle A represents the value lost in the "deals that do get made."

In the figure below, consider triangles A, B, and C. One of these could be labeled "Workers and machines who/that could be better used in another sector of the economy," while the other could be labeled "Consumers who have to pay more than necessary for their product." Which is which?

Triangle C is "Consumers who have to pay more than necessary for their product" and triangle B is "Workers and machines who/that could be better used in another sector of the economy."

Assess the validity of the following statement in terms of incentives: A scientist who earns a percentage of the profits from any new medicine he or she may invent is likely to work longer hours in a laboratory researching new cures for diseases than a scientist who will get a handshake and a thank you note from the boss if he or she invents a new medicine.

True. The potential for monetary reward provides an incentive to work harder.

Evaluate the accuracy of the following statement: People search harder for substitutes for oil when the price of oil is high.

True; when oil prices are high, there are greater potential savings from oil substitutes.

Many people talk about manufacturing jobs leaving the United States and going to other places like China. Why isn't it possible for all jobs to leave the United States and go overseas, as some people fear?

U.S. productivity is still higher than China's, which is why the United States has higher wages.

When the crime rate falls in the area around a factory, what probably happens to wages at that factory?

Wage rates would fall.

Decades ago, Washington, DC, a fairly small city (in geographic area), wanted to raise more revenue by increasing the gas tax. Washington, DC shares borders with Maryland and Virginia, and it's very easy to cross the borders between these states without even really noticing; the suburbs just blend together. When Washington, DC, increased its gasoline tax, how much revenue did it raise? How would your answer change if Washington, DC, Maryland, and Virginia all agreed to raise their gas tax simultaneously?

When Washington, DC, raised its tax alone, it gained very little revenue. If all the states raise their taxes together they would gain a lot of revenue.

How do U.S. business owners change their behavior when the minimum wage rises? How does this affect teenagers?

When the minimum wage rises, business owners hire fewer low-skilled, teenage workers and conditions get worse for teenage workers.

Butter and margarine are substitutes. When the price of margarine increases, what will happen to the demand for butter? Why?

When the price of margarine rises, some people will switch from margarine to butter. Because of this, demand will increase, making butter's demand curve shift up and to the right.

In his book The Choice, economist Russ Roberts asks how voters would feel about a machine that could convert wheat into automobiles. If this machine existed, would it destroy jobs in the auto industry?

Yes, it would destroy jobs in the short run, but market economies are very good at creating new jobs in the long run.

An important tradition in the Santos family is that they eat the same meal at their favorite restaurant every Sunday. By contrast, the Chen family spends exactly $50 for their Sunday meal at whatever restaurant sounds best. Does either family have a unit elastic demand for restaurant food?

Yes, the Chen family.

In the Wealth of Nations, Adam Smith said that one reason specialization makes someone more productive is because "A man commonly saunters a little in turning his hand from one sort of employment to another." How can you use this observation to improve your pattern of studying for your four or five college courses this semester?

You should devote entire days to studying for each course instead of switching back and forth between subjects during the day.

You manage a department store in Florida, and one winter day you read in the newspaper that orange juice futures have fallen dramatically in price. Should your store stock up on more sweaters than usual, or should your store stock up on more Bermuda shorts?

You should stock up on Bermuda shorts.

Immigration will lead to a big boost in the labor supply. What field would you rather be in: a field where the demand for your kind of labor is elastic or a field where the demand for your kind of labor is inelastic?

a field where demand for your kind of labor is elastic

Over the last 10 years, China and India have both become substantially richer. At the same time, oil prices have risen. The change in oil prices is due to:

a rise in demand.

If the price in a market is above the equilibrium price, then the market is experiencing:

a surplus.

Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. What possible prices for the haircut would be beneficial to both Maria and Juan? How much total surplus (that is, the sum of consumer and producer surplus) would be generated by this haircut?

any price from $25 to $40 would be beneficial to both Maria and Juan; $15

The figure below shows a tariff on sugar that is lower than the one we discussed in the chapter, so some sugar is imported even after the tariff.Which area represents the wasted resources when the tariff is in place?

area B

The figure below shows a tariff on sugar that is lower than the one we discussed in the chapter, so some sugar is imported even after the tariff.Which area represents the lost gains from trade when the tariff is in place?

area C

The figure below shows a tariff on sugar that is lower than the one we discussed in the chapter, so some sugar is imported even after the tariff.Which area represents the tariff revenue collected by the government?

area D

When the government taxes an activity, resources such as labor, machines, and bank lending will tend to gravitate _______ the activity that is taxed and will tend to gravitate _______ the activity that is not taxed.

away from; toward

Take a look at the figure above showing the Hollywood Stock Exchange. If investors in the Hollywood Stock Exchange were too optimistic on average, where would you expect the dots to cluster?

below the red line

For many years it was illegal to color margarine yellow (margarine is naturally white). In some states, margarine manufacturers were even required to color margarine pink! Who do you think supported these laws? (Hint: What color spread would you like to put on your toast?)

both butter manufacturers and dairy farmers

Glass is an input for producing both windows and bottles. However, glass bottles are a less valuable product than glass windows. If the price of glass increases dramatically, what are we likely to see a lot less of: glass windows or glass bottles?

bottles

How does the free market eliminate a shortage?

by causing the price to rise

The market for marbles is represented in the graph below. What is the total producer surplus? The total consumer surplus? What are the total gains from trade?

consumer surplus = $150; producer surplus = $100; total gains from trade = $250

Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. If the state where Maria and Juan live instituted a tax on services that included a $5 per haircut tax on stylists and barbers, the range of haircut prices that benefit both Maria and Juan would __________ and the total economic benefit of the haircut would ____________.

decrease by $5; decrease

If the elasticity of demand for college textbooks is -0.1 and the price of textbooks increases by 20%, the quantity demanded of textbooks will:

decrease by 2%.

When the government expands the number of pollution allowances, does that increase or decrease the cost of polluting? What about when the number of pollution allowances is cut back?

decreases; increases

The U.S. government has many subsidies for alternative energy development: Some are called subsidies; some are called tax breaks. Either way, they work just like the subsidies we studied in this chapter. The market for windmills could be represented by one of the two graphs below. In the first graph, who gets the lion's share of any extra surplus created by the subsidy?

demanders, because they're more inelastic

A headline in The New York Times read: "Study Finds Enrollment Is Up at Colleges Despite Recession." Given what you now understand about opportunity cost, the headline should probably read: "Study Finds Enrollment Is Up at Colleges _______ Recession.

either due to or because of

Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food. If a government is hoping that a small tax can actually discourage a lot of junk food purchases, it should hope for:

elastic supply and elastic demand.

In your college town, the local government decrees that thousands of apartments close to campus are uninhabitable and must be torn down next semester. If you want to pay the lowest rent possible, you should hope that demand for apartments is:

elastic.

Figure 9.1 in the book looks at a case in which the world price is below the domestic no-trade price. Let's look at a case in which the world price is above the domestic no-trade price. We'll work with the market for airplanes shown in the figure below.When there is free trade, what would you call the gap between the domestic quantity supplied and the domestic quantity demanded?

exports

The benefit your neighbor receives from hearing you play your pleasant music is a(n):

external benefit.

The extra safety your neighbor might experience because criminals tend to stay away from neighborhoods that have a lot of burglar alarms is a(n):

external benefit.

The annoyance your neighbor feels because she doesn't like your achingly conventional music is a(n):

external cost.

The crime that is more likely to occur to your neighbor once a criminal sees a "Protected by Alarm" sticker on your window is a(n):

external cost.

When bad weather in India destroys the crop harvest, does this sound like a fall in the total "supply" of crops or a fall in people's "demand" for crops?

fall is supply

According to the supply curve, if the price of cars ______ carmakers will produce ______ cars.

falls; fewer

When the price of a good increases, the quantity demanded ______. When the price of a good decreases, the quantity demanded ______.

falls; rises

Consider a demand curve with an elasticity of 1.1. This demand curve will be relatively _____ and a fall in the price of this good will result in ______ total revenue.

flat; rising

Consider a demand curve with an elasticity of 10.0. This demand curve will be relatively _____ and a fall in the price of this good will result in ______ total revenue.

flat; rising

Consider a demand curve with an elasticity of 2.0. This demand curve will be relatively _____ and a fall in the price of this good will result in ______ total revenue.

flat; rising

The U.S. Department of Agriculture (USDA) has been concerned that Americans aren't eating enough fruits and vegetables, and they've considered coupons and other subsidies to encourage people—especially lower-income people—to eat these healthier foods. To determine whether such programs are worthwhile, the USDA hired economists to determine the elasticities of demand of some popular fruits. Using the table of these demand elasticity estimates below, determine which fruits would experience an increase in total revenue due to a 10% drop in their price.

grapefruits and oranges

The U.S. Department of Agriculture (USDA) has been concerned that Americans aren't eating enough fruits and vegetables, and they've considered coupons and other subsidies to encourage people—especially lower-income people—to eat these healthier foods. To determine whether such programs are worthwhile, the USDA hired economists to determine the elasticities of demand of some popular fruits. Using the table of these demand elasticity estimates below, determine for which three fruits the government should offer "10% off" coupons to have the biggest possible effect on quantity demanded.

grapefruits, grapes, and oranges

The U.S. government has many subsidies for alternative energy development: Some are called subsidies; some are called tax breaks. Either way, they work just like the subsidies we studied in this chapter. The market for windmills could be represented by one of the two graphs below. In which case will a subsidy cut the price paid by the buyers the most?

in the case of the first graph, when demand is inelastic

The U.S. government has many subsidies for alternative energy development: Some are called subsidies; some are called tax breaks. Either way, they work just like the subsidies we studied in this chapter. The market for windmills could be represented by one of the two graphs below. In which case will a subsidy increase the price paid to the sellers the most?

in the case of the second graph, when supply is inelastic

Petroleum, natural gas, coal, and solar power are all sources used to produce energy, and, therefore, can be considered to be substitutes. When the price of petroleum increases, the demand for natural gas ______, the demand for coal ______, and the demand for solar power ______.

increases; increases; increases

In your college town, real estate developers are building thousands of new student-friendly apartments close to campus. If you want to pay the lowest rent possible, you should hope that demand for apartments is:

inelastic.

If income increases and the demand for Good X shifts as shown below, then Good X is a(n) ______ good, such as ______.

inferior; Ramen noodles

Once you graduate from college, get a good job, and experience a rise in income, you will choose to buy fewer ______ goods, such as______.

inferior; Ramen noodles

According to the United Nations, there were roughly 300 million humans on the planet 1,000 years ago. Essentially all of them were poor by modern standards: They lacked antibiotics, almost all lacked indoor plumbing, and none traveled faster than a horse or a river could carry them. Today, between 1 billion and 3 billion humans (out of about 7 billion total humans) are poor. So, over the last 1,000 years, what has happened to the fraction of humans who are poor?

it fell

According to the United Nations, there were roughly 300 million humans on the planet 1,000 years ago. Essentially all of them were poor by modern standards: They lacked antibiotics, almost all lacked indoor plumbing, and none traveled faster than a horse or a river could carry them. Today, between 1 billion and 3 billion humans (out of about 7 billion total humans) are poor. What happened to the total number of people living in deep poverty?

it rose

For most young people, working full-time and going to school are substitutes; you tend to do one or the other. Thus, when it's tough to find a job, this ______ the opportunity cost of going to college and the demand for college ______.

lowers; rises

A pharmaceutical business is ______ likely to hire highly educated workers and use new, experimental research methods when it expects the price of its new drug to be ______.

more; high

Consider a factory, located in the middle of nowhere, producing a nasty smell. As long as no one is around to experience the unpleasant odor, are any externalities produced? What happens if a family moves in next door to the smelly factory; is there an externalities problem now?

no; yes

Bill is in Japan, trying to get a job as a full-time translator; he wants to translate English TV shows into Japanese and vice versa. He notices that the wage for translators is very low. Who is the competition that is pushing the wage down?

other translators

Jon is on eBay bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, with whom is Jon competing?

others who are bidding on the graphic novel

Suppose that the quantity demanded and quantity supplied in the market for milk is as follows:What is the equilibrium price and quantity of milk?

price = $3; quantity = 3,500

In recent years, Zimbabwe has had hyperinflation, with prices tripling (or more!) every month. According to what you learned in this chapter, what do you think the government can do to end this hyperinflation?

print less money

The pleasure you receive from listening to your iTunes download is a(n):

private benefit.

The safety you enjoy as a result of having the security system is a(n):

private benefit.

The price you pay for a security system for your home is a(n):

private cost.

The price you pay for an iTunes download is a(n):

private cost.

In the figure below how many pounds of sugar are sellers willing to sell at a price of $20? How much is demanded at this price?

quantity supplied = 20; quantity demanded = 40

The price of a one-bedroom apartment in Washington, DC, is currently $1,000 per month, but the supply and demand curves look as follows:Based on the supply and demand curves, the market for apartments is experiencing a ______ and we would expect apartment prices to ______.

shortage; increase

Consider a demand curve with an elasticity of 0.2. This demand curve will be relatively _____ and a fall in the price of this good will result in ______ total revenue.

steep; falling

Consider a demand curve with an elasticity of 0.9. This demand curve will be relatively _____ and a fall in the price of this good will result in ______ total revenue.

steep; falling

substitutes.

The U.S. government has many subsidies for alternative energy development: Some are called subsidies; some are called tax breaks. Either way, they work just like the subsidies we studied in this chapter. The market for windmills could be represented by one of the two graphs below. In the second graph, who gets the lion's share of any extra surplus created by the subsidy?

suppliers, because they're more inelastic

When oil companies expect the price of oil to be higher next year, what happens to the volume of oil produced today?

supply decreases

The imposition of an excise tax (production tax) on each unit produced will cause:

supply to decrease

In the figure below, what is the total revenue raised by the tax, in dollars? What is the deadweight loss from the tax, in dollars? (Note: You've seen the formula for the second question before. We'll let you look around a little for the first one.)

tax revenue = $500; deadweight loss = $100

Which government agency might have helped to avoid much of the Great Depression had it acted more quickly and appropriately?

the US Federal Reserve

From your graph, you see that:

the demand curve for pencils slopes upward.

Let's see if we can formulate any real laws about the economics of taxation. Which of the following must be TRUE, as long as supply and demand curves have their normal shape (demand curves are downward sloping while supply curves are upward sloping)? If there is a tax:

the equilibrium quantity must fall, and the price that buyers pay must rise.

Let's see if we can formulate any real laws about the economics of taxation. Which of the following must be TRUE as long as supply and demand curves have their normal shape (demand curves are downward sloping while supply curves are upward sloping)? If there is a tax:

the equilibrium quantity must fall, and the price that sellers receive must fall.

the south has the comparative advantage in low-quality cars

Consider the following table of prices of pencils and quantities supplied. Based on this information, we know that:

the supply curve for pencils slopes upward

President Jimmy Carter not only deregulated airline prices, he also deregulated much of the trucking industry as well. Trucks carry almost all of the consumer goods that you purchase, so almost every time you purchase something, you're paying money to a trucking company. Who do you think asked Congress and the President to keep price floors for trucking in place?

the trucking companies

When the government subsidizes an activity, resources such as labor, machines, and bank lending will tend to gravitate _______ the activity that is subsidized and will tend to gravitate _______ activity that is not subsidized.

toward; away from

Deirdre has a choice between writing one more book this year or five more articles this year. What is the opportunity cost of writing half a book this year, in terms of articles?

two and a half articles

Erin has a choice between two activities. She can repair one transmission per hour or she can repair two fuel injectors per hour. What is the opportunity cost of repairing one transmission?

two fuel injectors

Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food. If the Oklakansas government wants to strongly discourage people from eating junk food will it need to set a higher tax rate when junk food demand is elastic or when it is inelastic?

ECON CH1 EXAM HMWK ?'S

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