Principles of Microeconomics (Econ 2) Drake University, Summer 200 !

illiam M" #oal

Signature: Printe$ name:

QUIZ #5 VERSION B Market Controls and Taxes J l! "#$ %&&'

%&S'(U)'%*&S: '+is ,ui- is close$./ook, close$.notes" Simple calculators are permitte$, /ut grap+ing calculators or calculators 0it+ alp+a/etical key/oar$s are &*' permitte$" &umerical ans0ers, if roun$e$, must /e correct to at least 1 significant $igits" Point values for eac+ ,uestion are note$ in /rackets" Ma2imum total points are 300" I( M lt)*le +,o)+e- )ircle t+e one /est ans0er to eac+ ,uestion" 41 pts eac+: 11 pts total5 (3) %f t+e free.market e,uili/rium price of corn is 67, /ut t+e government imposes a price ceiling (or legal ma2imum price) of 630, t+en t+at price ceiling a" is /in$ing" /" is non/in$ing" c" creates e2cess $eman$" $" creates e2cess supply" e" 8ll of t+e a/ove" (2) %f a price floor (or legal minimum price) for /ananas 0ere /in$ing, it 0oul$ create a" e2cess $eman$ for /ananas" /" e2cess supply of /ananas" c" a s+ortage of /ananas" $" an increase in t+e ,uantity of /ananas $eman$e$" (1) !+o loses if a price ceiling (or legal ma2imum price) is impose$ on milk9 a" 8ll consumers of milk" /" 8ll pro$ucers of milk" c" 8ll consumers an$ pro$ucers of milk" $" &o one loses:everyone gains" (;) 8 ,uota on selling 0oo$ from tropical rainforests 0oul$ cause t+e price of 0oo$ from tropical rainforests to a" rise" /" fall" c" remain constant" $" rise or fall, $epen$ing on t+e s+apes of t+e $eman$ an$ supply curves" (7) !+o loses if a ,uota is impose$ on /uyers of fire0orks9 a" 8ll sellers of fire0orks" /" 8ll /uyers of fire0orks" c" 8ll sellers an$ /uyers of fire0orks" $" &o one loses:everyone gains" (<) Suppose t+e price elasticity of supply of computers in %o0a is ="0 an$ t+e price elasticity of $eman$ is .0" " %f a ta2 is impose$ on computers sol$ in %o0a, 0+ic+ si$e of t+e market effectively pays most of t+e ta29 a" Sellers" /" #uyers" c" Sellers an$ /uyers eac+ pay +alf of t+e ta2" $" 8ns0er $epen$s on 0+ic+ si$e is legally re,uire$ to remit t+e ta2 to t+e government" (=) Suppose t+e supply of private parking $o0nto0n 0ere perfectly inelastic" %f parking 0ere ta2e$, a" /uyers 0oul$ pay all of t+e ta2" /" /uyers 0oul$ pay most of t+e ta2" c" sellers 0oul$ pay all of t+e ta2" $" sellers 0oul$ pay most of t+e ta2" ( ) !+o 0ins if consumers of natural gas are re,uire$ to pay a ta2 on eac+ unit of natural gas t+at t+ey /uy9 a" 8ll consumers of natural gas" /" 8ll pro$ucers of natural gas" c" #ot+ consumers an$ pro$ucers of natural gas" $" &eit+er consumers nor pro$ucers of natural gas" (>) Suppose t+e price elasticity of $eman$ for vitamins is .0"< an$ t+e price elasticity of supply of vitamins is <"0" %f a su/si$y is given for vitamins, a" Sellers of vitamins 0ill en?oy most of t+e /enefit" /" #uyers of vitamins 0ill en?oy most of t+e /enefit" c" Sellers an$ /uyers eac+ en?oy +alf of t+e /enefit" $" 8ns0er $epen$s on 0+ic+ si$e is legally $esignate$ to receive t+e su/si$y c+eck from t+e government"

Principles of Microeconomics (Econ 2) Drake University, Summer 200 (30) '+e num/er of c+il$ car seats actually sol$ 0oul$ increase if t+e government enacte$ a" a ,uota on sellers of c+il$ car seats" /" a ,uota on /uyers of c+il$ car seats" c" a price floor (or legal minimum price) for c+il$ car seats" $" a price ceiling (or legal ma2imum price) on c+il$ car seats" e" all of t+e a/ove" f" none of t+e a/ove"

@ui- 7 Aersion # Page 2 of < (33) '+e amount of incan$escent lig+t /ul/s actually sol$ 0oul$ $ecrease if t+e government enacte$ a a" a ,uota on sellers of incan$escent lig+t /ul/s" /" a ,uota on /uyers of incan$escent lig+t /ul/s" c" a price floor (or legal minimum price) for incan$escent lig+t /ul/s" $" a price ceiling (or legal ma2imum price) on incan$escent lig+t /ul/s" e" all of t+e a/ove" f" none of t+e a/ove"

II( .ro/le0s- %nsert your ans0er to eac+ ,uestion /elo0 in t+e /o2 provi$e$" Beel free to use t+e margins for scratc+ 0orkonly t+e ans0ers in t+e /o2es 0ill /e gra$e$" !ork carefullypartial cre$it is not normally given for ,uestions in t+is section" (3) 4Price controls: 32 pts5 '+e follo0ing grap+ s+o0s t+e market for corn" Suppose a price floor (or legal minimum price) of 6< is impose$ on t+is market" &o corn may /e sol$ for less t+an 6<"

$12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Millions of bushels

Price per bushel

Demand Supply

a" %s t+is price floor binding or nonbinding? /" Bin$ t+e ,uantity of corn actually sol$ 0it+ t+is price floor" c" !ill t+is price floor result in excess demand or excess supply of corn9 $" Co0 muc+9

million /us+els million /us+els

Principles of Microeconomics (Econ 2) Drake University, Summer 200

@ui- 7 Aersion # Page 1 of <

(2) 4@uotas: 32 pts5 Suppose t+e government 0ants to limit t+e use of coal" '+e government +as $eci$e$ to impose a ,uota of si2 million tons" '+e market for coal is s+o0n in t+e grap+ /elo0"

$160 $150 $140 $130 $120 $110

Price per ton

$100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Demand Supply

Millions of tons
Birst suppose t+e ,uota is impose$ on coal pro$ucers (mines)" Si2 million permits to sell one ton of t+e coal are $istri/ute$ to pro$ucers of coal" a" !+at 0ill /e t+e e,uili/rium price of coal 0it+ t+e ,uota9 6 per ton /" %f t+e government sells t+e permits to pro$ucers at auction, or allo0s permits to /e tra$e$, 0+at price 0ill /e t+e e,uili/rium price of a permit?

per permit

8lternatively, suppose t+e ,uota is impose$ on coal consumers (factories an$ electric po0er plants)" Si2 million permits to /uy one ton of coal are $istri/ute$ to consumers of coal" c" !+at 0ill /e t+e e,uili/rium price of coal 0it+ t+e ,uota9 6 per ton $" %f t+e government sells t+e permits to consumers at auction, or allo0s permits to /e tra$e$, 0+at price 0ill /e t+e e,uili/rium price of a permit?

per permit

Principles of Microeconomics (Econ 2) Drake University, Summer 200

@ui- 7 Aersion # Page ; of <

(1) 4'a2: 37 pts5 Suppose si2 /uyers an$ si2 sellers engage in a market similar to t+e e2ercise 0e $i$ in class" Eac+ /uyer may /uy at most one unit an$ eac+ seller may sell at most one unit, /ut no one is force$ to tra$e" 8ssume t+at /uyers an$ sellers are eac+ trying to ma2imi-e t+eir personal earnings (or Dgains from tra$eE)" Earnings for eac+ /uyer e,ual t+e /uyerFs value of t+e goo$ minus t+e price pai$" Earnings for eac+ seller e,ual t+e price receive$ minus t+e sellerFs cost of t+e goo$" Earnings of persons 0+o $o not tra$e are -ero" #uyersG values an$ sellersG costs are given in t+e follo0ing ta/le" Buyer Art Betty Carl Darla !an #elicia Value 63; 631 633 6 > 6 = 6 7 Seller Gary Helen Ian Jill "e!in $aura Cost 6 3 6 2 6 ; 6 < 6 > 632

$15 $14 $13 $12 $11 $10 Price $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 0 1 2 3 4 5 6 7 8 Quantity

Hou can use t+e grap+ at rig+t for scratc+ 0ork"

Suppose 0it+ some e2perience, t+e market settles on a single price" 8ll tra$es are ma$e at t+at price" a" !+at is t+at single price likely to /e9 Iive an ans0er to t+e nearest 0+ole $ollar" 6 /" Co0 many units of t+e goo$ 0ill /e sol$ in t+is market9

units

&o0 suppose a ta2 of 15 per unit is impose$ on sellers" 8ll sellers must pay t+is ta2 if t+ey sell t+e goo$" (%f t+ey $o not sell t+e goo$, t+ey o0e no ta2") )onsi$er t+e ne0 e,uili/rium" c" !+at is t+e net price receive$ /y sellers (e2clu$ing t+e ta2) likely to /e9 Iive an ans0er to 6 t+e nearest 0+ole $ollar" $" !+at is t+e total price pai$ /y /uyers (inclu$ing t+e ta2) likely to /e9 Iive an ans0er to t+e 6 nearest 0+ole $ollar" e" Co0 many units of t+e goo$ 0ill /e sol$ in t+is market9 units (;) 4Jaffer curve: 32 pts5 '+e grap+ /elo0 s+o0s t+e market for artic+okes" )alculate t+e ta2 revenue collecte$ /y t+e government if artic+okes are ta2e$ at t+e follo0ing rates: %ax rate a" 62 per poun$ /" 6; per poun$ c" 6< per poun$ $" 6 per poun$ %ax re!enue

6 6 6 6

million million million million

Price per pound

$12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 0 1 2 3 4 5 6

Demand Supply

10

Quantity (millions of pounds)

Principles of Microeconomics (Econ 2) Drake University, Summer 200

@ui- 7 Aersion # Page 7 of <

(7) 4Su/si$ies: 32 pts5 Suppose t+e market for infant car seats is $escri/e$ /y t+e curves grap+e$ /elo0"

$70 $65 $60 $55 $50 $45 $40 Price $35 $30 $25 $20 $15 $10 $5 $0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Quantity (millions)

Demand Supply

Suppose t+e government offers a su/si$y of 1"& per car seat" a" )ompute t+e e,uili/rium num/er of infant car seats t+at 0ill /e sol$" /" )ompute t+e e,uili/rium net price of an infant car seat pai$ /y /uyers (e2clu$ing t+e su/si$y)" c" )ompute t+e e,uili/rium total price of an infant car seat receive$ /y sellers (inclu$ing t+e su/si$y)" $" )ompute t+e $irect cost of t+e su/si$y program to t+e government" %n ot+er 0or$s, +o0 muc+ s+oul$ t+e government /u$get for su/si$y payments9

million 6 6 6 million

Principles of Microeconomics (Econ 2) Drake University, Summer 200

@ui- 7 Aersion # Page < of <

III( Cr)t)+al t,)nk)n2- !rite a one.paragrap+ essay ans0ering one ,uestion /elo0 (your c+oice)" 4; pts5 (3) Suppose t+e government is concerne$ t+at not enoug+ c+il$ren are getting $aily vitamins" !oul$ a price ceiling (or legal ma2imum price) for vitamins encourage more c+il$ren to get vitamins9 Kustify your ans0er 0it+ a supply.an$. $eman$ grap+" (2) )onsi$er t+e follo0ing statement" L%t is unfair t+at consumers must pay t+e ta2 on gasoline" '+e pro$ucers of gasoline are /ig, ric+ corporations" %t 0oul$ /e fairer if t+e ta2 0ere pai$ /y gasoline producers"L Does it matter 0+o pays t+e ta29 Kustify your ans0er 0it+ a supply.an$.$eman$ grap+" Please circle t+e ,uestion you are ans0ering" !rite your ans0er /elo0" Bull cre$it re,uires correct economic reasoning, legi/le 0riting, goo$ grammar inclu$ing complete sentences, an$ accurate spelling"

4en$ of ,ui-5