Econ Midterm- Part 2

When a price ceiling is in place keeping the price below the market price, what's larger: quantity demanded or quantity supplied? *

Quantity demanded

Airline regulation of the 1970s produced a similar result to which of the following government interventions?

Minimum wage laws

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 a previous $5 tax increases to $20, will the haircut transaction still happen?

No

Which town will likely attract shoppers with higher incomes?

Meterville

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 per month

Given that Maria and Juan find a price suitable to both of them, how much total surplus (i.e., the sum of consumer and producer surplus) would be generated?

$15

With these price controls on bread, would you expect bread quality to rise or fall?

Quality falls

Who is impacted most by a change in the minimum wage?

teenagers

If the state where Maria and Juan live instituted a tax on services that included a $5 per haircut tax on stylists and barbers, what is one price that will make both Maria and Juan better off?

$30

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 price for the haircut would be beneficial to both Maria and Juan?

$30

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

When will entrepreneurs be more likely to fill up their pickup trucks with flashlights and drive into a disaster area: when they can sell their flashlights for $5 each or when they can sell them for $40 each?

$40

In the late 1990s, the city 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, B of A banned "out-of-network" ATM usage. 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. Calculate the exact amount of producer and consumer surplus in the out-of-network ATM market in Santa Monica after the ban. How large is consumer surplus?

0

Imagine that you can hire four low-skilled workers to move dirt with shovels at $5 an hour, or you can hire one skilled worker at $24 an hour to move the same amount of dirt with a skid loader. Who will you hire if the minimum wage increases from $5 per hour to $6.50 per hour?

1 high-skilled worker

Choose one from each pair: a. Fast-food employees who earn $8 per hour b. Lawyers who charge $800 per hour

Fast-food employees who earn $8 per hour

Which of the following partially accounts for the scarcity of low-price real estate in Mumbai?

A lengthy and costly approval process means developers must offer high-price homes in order to make a profit.

Given your answer on the previous question, how much revenue did it raise when it increased its gasoline tax?

A little revenue

If DC, Maryland, and Virginia all agreed to raise their gas tax simultaneously, how much revenue could the gas tax raise? Note: These states have heavily populated borders with each other, but they don't have any heavily populated borders with other states.

A lot of revenue

If he 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?

Better off

How does a free market eliminate a shortage?

By letting the price rise.

On average, should we expect better customer service from a capitalist or a Communist employee?

Capitalist

In the 1970s, AirCal and Pacific Southwest Airlines flew only within California. As we mentioned, the 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. Which flight had a nicer meal?

Chicago-to-Cleveland flight

If a government decided to impose price controls on gasoline, what could it do to avoid the time wasted waiting in lines? Though there are several solutions to this problem, only one of the options below is correct. a. Restrict gasoline consumption to high-value uses. b. Ban lines for gasoline. c. Create gasoline rations. d. Ban black markets for gasoline.

Create gasoline rations.

In a rent-controlled apartment, a landlord will likely do which of the following more often:

Discriminate more against applicants

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. For the tax to actually deter people from eating junk food, should junk food demand be elastic or inelastic?

Elastic

Let's take a look at the supply side of junk food. If junk food supply is highly elastic—perhaps because it's not that hard to start selling salads with lowfat dressing instead of mayonnaise- and cheese-laden burgers—will a junk food tax have a bigger effect if supply were inelastic or elastic?

Elastic

Decades ago, Washington, DC, a fairly small city, 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. How elastic is the demand for gasoline sold at stations within Washington, DC? In other words, if the price of gas in DC rises, but the price in Maryland and Virginia stays the same, will gasoline sales at DC stations fall a little, or will they fall a lot?"

Elastic - gasoline sales would fall a lot

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

Fill in the blanks: As long as supply and demand curves have their normal shape (the demand curve has a negative slope while supply curves have appositive slope), if there is a tax, the equilibrium quantity must _______ and the price that sellers receive must _______.

Fall; fall

Fill in the blanks: As long as supply and demand curves have their normal shape (the demand curves have a negative slope while supply curves have a positive slope), if there is a tax, the equilibrium quantity must _______ and the price that buyers pay must _______. *

Fall; rise

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?

Fewer people will be covered because health insurance companies will supply less.

In the opening scene of the classic Eddie Murphy comedy Beverly Hills Cop, Axel Foley, a Detroit police officer, is stopping a cigarette smuggling ring. Of course, smugglers don't pay the tax when the cigarettes cross state lines. Which way do you suspect the smugglers were moving the cigarettes, based on economic theory?

From the low-cost South to the high-tax North.

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 or price floors—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 whether Diocletian imposed a ceiling or a floor? If so, which is it? (Yes, there really was an edict of Diocletian, and Wikipedia has excellent coverage of ancient Roman history.)

Indeterminate with the given information.

If the Oklakansas government wants to strongly discourage people from eating junk food, when will it need to set a higher tax rate: When junk food demand is elastic or when it is inelastic?

Inelastic

What does it mean that elasticity equals escape? (This is worth remembering: Elasticity is one of the toughest ideas for most economics students.)

It is easy for market participants to escape to another market if they have elastic demand or supply

One 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?

It is elastic

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, what will happen to the $15 of economic benefit?

It will stay the same

Antibiotics are often given to people with colds (even though they are not useful for that purpose), but they are also used to treat life-threatening infections. If there was a price control on antibiotics, what do you think would happen to the allocation of antibiotics across these two uses?

It would go to a mix of the two.

Business leaders often say that there is a "shortage" of skilled workers, and so they argue that immigrants need to be brought in to do these jobs. For example, an AP article entitled "New York farmers fear a shortage of skilled workers," pointing out that a special U.S. visa program, the H-2A program, "allows employers to hire foreign workers temporarily if they show that they were not able to find U.S. workers for the jobs." (Source: Thompson, Carolyn. May 13, 2008. N.Y. farmers fear a shortage of skilled workers Associated Press.) How do unregulated markets cure a "labor shortage" when there are no immigrants to boost the labor supply?

Let the price of labor increase.

Which of the following is NOT a consequence of rent controls in Mumbai?

Low cost rentals have incentivized migration to Mumbai, leading to overcrowding.

How are rent controls related to building collapses in India?

Low rent means landlords may not take in enough revenue to fund repairs.

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 (or $1.25 per 15 minutes). Where will it be easier to find parking: in Freedonia or Meterville?

Meterville

One town will tend to attract shoppers who hate driving around looking for parking. Which one?

Meterville

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 6 years to become a general practitioner or a pediatrician, but it takes about 8 or 9 years to become a specialist like a gynecologist, surgeon, or ophthalmologist. What kind of doctor would you want to become under this system? (Note: The actual Canadian system does allow a specialist to earn a bit more than general practitioners, but the difference isn't big enough to matter.)

Pediatrician

Choose one from each pair: a. People with desk jobs b. People who can disappear for a couple of hours during the day

People who can disappear for a couple of hours during the day

Some people with diabetes absolutely need to take insulin on a regular basis to survive. 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, payable every month to the U.S. Treasury, who will bear most of the burden of the tax?

People with diabetes

Suppose instead that because of government corruption, the insulin manufacturers convince the U.S. government to pay the insulin makers $10 per cubic centimeter of insulin, payable every month from the U.S. Treasury. Who will get most of the benefit of this subsidy?

People with diabetes

Price controls distribute resources in many unintended ways. In the following cases below, who will probably spend more time waiting in line to get scarce, price-controlled goods? Choose one from each pair: a. Working people b. Retired people

Retired people

Which one of the following options is a real life example of a wage subsidy?

The Earned Income Tax Credit

The competitive market equilibrium maximizes gains from trade. Taxes and subsidies, by altering the market outcome, reduce the gains from trade. Does this happen primarily because of the impact of taxes and subsidies on prices, or the impact of taxes and subsidies on quantities?

The impact on quantities

In our discussion of taxation, we've acted as if it were effortless to pass and enforce tax laws. But, of course, law enforcement officials including the Internal Revenue Service put a lot of effort into enforcing tax laws. Let's think for a moment about what kind of taxes are easiest to collect, just based on the basic ideas we've covered. Who will make the most effort to escape a tax?

The party who is inelastic

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 person with more inelastic demand for the relationship will bear the tax - he or she will do most of the driving.

Consider jewelry. Is a luxury tax more likely to hurt the buyers of jewelry, or the sellers of jewelry?

The sellers

What effect do wage subsidies have on employment?

Wage subsidies increase employment

Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the United States rose from about $1.50 per gallon to over $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why?

There was no price control on gasoline at the time.

Which job exists in part because time-sensitive wealthy individuals want to pay someone else to wait in line for them?

Ticket scalpers

What effect do wage subsidies have on the demand for welfare payments?

Wage subsidies decrease the demand for welfare payments

Fill in the blanks: 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 ________ activity that is not taxed.

away from; toward

Suppose the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price. To keep it simple, assume that people must wait in line to get bread at the controlled price. Would consumer surplus rise, fall, or can't you tell with the information given?

consumer surplus decreases.

Fill in the blanks: Wage subsidies ____ the demand for labor and the number of low skilled jobs. The minimum wage laws ____ the demand for labor and the number of low skilled jobs.

increase; decrease

A review of the jargon: Is rent control a "price ceiling" or a "price floor?"

price ceiling

A review of the jargon: Is the minimum wage a "price ceiling" or a "price floor?"

price floor

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?

quantity supplied decreases.

Fill in the blanks: 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

Who do you think asked Congress and the president to keep price floors for trucking?

trucking companies