Questions:
1. (a) Over the years there has been great improvement in farm technology. As a result, the American farmer is now more productive than ever before. However, the economic consequence of increased productivity has been a lowering of the price of farm output. Explain and show the effects of better technology
on a demand and supply diagram.
(b) Suppose because of farmer complaints the government has decided to guarantee a price for farm products. Would this be a price ceiling or floor? Show and explain.
(c) What are the consequences for farm output as a result of this guaranteed price? Show and explain
(d) What does the term "equilibrium" mean in the context of a market economy?
(e) Explain two ways in which there can be a new equilibrium at the "guaranteed" price.
2. (a)The Surgeon General has mounted a very successful advertising campaign in favor of cigarette smoking directed at consumers. Show and explain the effects of this on a demand/supply diagram for cigarettes.
(b) Based on your graph above, can some people actually end up decreasing their consumption of cigarettes? Show and explain.
c) Suppose there is a shift in the demand curve but there is no change in the amount of cigarettes sold. Show and explain how that might happen.
(d) Under what scenario (demand/supply diagram) would the ad. Campaign be most successful?
(e) Suppose, instead of targeting demand, the government decided to influence supply. Explain how this might happen.
(f) " The degree to which a campaign in favor of smoking directed towards the supply of cigarettes is successful depends upon the elasticity of demand." True or False? Show and explain.
3. The market for apples is not in equilibrium at P= $0 because producers are not willing to supply anything free and there is excess demand worth 8 apples. Producers, on the other hand, say that they will be happy to meet the demand for 8 apples provided the price is $8 per apple. Nothing doing, say the customers. At that price, they will not buy any.
a) What is the equation for demand? Show your work.
b) What is the equation for supply? Show your work
c) If the influential neighborhood moms manage to convince the government to place a price ceiling on the apple market at $2, what will be the amount of the apples consumed? Show your work
4.The market for Spam is at equilibrium at P = $1 and Q = 20 billion tons
a) Show this in a demand and supply diagram.
b) Redraw the diagram toshow consumer and producer surplus.
c) What is consumer surplus?
d) What is producer surplus?
e) Now assume that the government,in an effort to discourage Spam production, adds a $0.50 tax on Spam production. Show the amount of deadweight loss created by this tax.
f) What is deadweight loss and why does it make our market not efficient?
4.Assume the supply and demand curves for cars given below..
P = 15,000 - 2,500 QP = 11,000
Where P is in dollars and Q is in millions of cars per month.
a) Draw this market in a graph and show the equilibrium price and quantity.
b) Calculate the amount of consumer surplus in this market and explain what that number means.
c) Calculate the total amount of the producer surplus in this market.
d) Now suppose that the government decides to impose a tax of $1000 per car on the supplier/producer. What is the amount of tax revenue that the government collects? Show, calculate, and explain.
e)What has happened to total economic surplus as a result of the tax? Show and explain.