chp 3 hw
Price ceilings are socially costly because they reduce the number of economic transactions that occur, creating deadweight loss. However, there are other ways in which they are costly. Suppose the government imposes a price ceiling of $1 on bread which is lower than the market equilibrium price.
Which of the following is an unintended consequence that increases the magnitude of the inefficiency of price ceilings in the market for bread? People will incur a search cost when attempting to buy bread, going from store to store to see if any bread is available.
The government uses taxes and subsidies to guide consumption and production decisions. A tax increases the price paid by buyers and reduces the price received by sellers. In contrast, a subsidy reduces the price paid by buyers and increases the price received by sellers.
Which of the following is true about subsidies? Even though subsidies have the opposite effect of taxes, they still result in a loss to society because taxpayers must foot the bill.
You are a USDA economist, and the Senate Finance Committee has come to you for advice. The government is considering bolstering its finances by imposing a tax on either salt or blue cheese. You know that the markets for salt and blue cheese are roughly the same size, though the demand for salt is highly inelastic, while the demand for blue cheese is highly elastic. Which option do you recommend as the least costly choice?
A tax on salt would be less costly, because the deadweight loss that occurs would be smaller due to the demand being relatively inelastic in this market.
The U.S. Senate is considering a bill that would tax the sale of laptop computers in order to fund a computer education program. The Congressional Budget Office (CBO) estimates that if it implements a low tax of $12 per laptop, revenue should be sufficient to exactly fund the program. The CBO also estimates that a high tax of $230 per laptop will exactly fund the program.
If these two tax policies will exactly fund the program, which policy will be better for society? The $12 tax, because there will be less deadweight loss.
Black markets are exchanges that occur in violation of the law and government regulations. For the following scenarios, select the answer that best describes how a black market could potentially improve society's well-being.
a. The government imposes a binding $1 per loaf price ceiling on bread. ----In a black market, people willing to pay more than $1 would still be able to acquire bread, resulting in allocating bread to customers who value it the most. b. The government establishes a binding $20 per bushel price floor in the market for corn. ------In a black market, surplus corn could be sold at a price below $20 per bushel. This would allow producers to cover costs and avoid wasting excess corn.
In 1997, Sony introduced the DVD player, replacing the VHS videotape and shepherding in a new era of high‑definition movie viewing. Soon, there were over 100 different player models competing. DVD became the standard, preferred way to watch movies at home; VHS movies became increasingly difficult to rent and/or purchase. Then, in 2010, Netflix introduced streaming video that allowed users to watch movies on their television or mobile device.
a. Why was the consumer surplus gained by those purchasing DVD players likely quite high between 1997 and 2010? ----Because DVD buyers valued the product at much more than the price they paid. b. Did the introduction of streaming video alter the consumer surplus received by purchasers of DVD players after 2010? -----Yes, because the introduction of streaming video affected the price that DVD buyers were willing to pay. c. What happened to the consumer surplus received by movie viewers after 2010? ------After 2010, consumer surplus received by movie viewers increased.
