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Microeconomics

Dean Karlan, Jonathan Morduch

Chapter 6

Government Intervention - all with Video Answers

Educators

Chapter Questions

03:13

Problem 1

Many people are concerned about the rising price of gasoline. Suppose that government officials are thinking of capping the price of gasoline below its current price. Which of the following outcomes do you predict will result from this policy? Check all that apply. [LO 6.1]
a. Drivers will purchase more gasoline.
b. Quantity demanded for gasoline will increase.
c. Long lines will develop at gas stations.
d. Oil companies will work to increase their pumping capacity.

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:53

Problem 2

Figure $6 \mathrm{P}-1$ shows a market in equilibrium.
a. Draw a price ceiling at $\$ 12 .$ What is the amount of shortage at this price? Draw and calculate the deadweight loss. [LO 6.1]
b. Draw a price ceiling at $\$ 4 .$ What is the amount of shortage at this price? Draw and calculate the deadweight loss. [LO 6.1]

Crystal Wang
Crystal Wang
Numerade Educator
02:06

Problem 3

Decades of overfishing have dramatically reduced the world supply of cod (a type of whitefish).
Farm-raised halibut is considered a close substitute for ocean-fished cod. [LO 6.1$]$
a. On the graph in Figure $6 \mathrm{P}-2$, show the effect of overfishing cod on the market for farmed halibut. A fast-food chain purchases whitefish for use in its Fish 'n' Chips meals. Already hurt by the reduced supply of cod, the fast-food chain has lobbied aggressively for price controls on farmed halibut. As a result, Congress has considered imposing a price ceiling on halibut at the former equilibrium price- the price that prevailed before overfishing reduced the supply of cod.
b. On your graph, show what will happen in the market for farmed halibut if Congress adopts the price control policy. Draw and label the price ceiling, quantity demanded, quantity supplied, and deadweight loss.

Doris Bennett
Doris Bennett
Numerade Educator
03:48

Problem 4

The Organization for the Promotion of Brussels Sprouts has convinced the government of Ironia to institute a price floor on the sale of brussels sprouts, at $\$ 8$ per bushel. Demand is given by $\mathrm{P}=9-\mathrm{Q}$ and supply by $\mathrm{P}=2 \mathrm{Q}$, where $\mathrm{Q}$ is measured in thousands of bushels. [LO 6.2$]$
a. What will be the price and quantity of brussels sprouts sold at market equilibrium?
b. What will be the price and quantity sold with the price floor?
c. How big will be the excess supply of brussels sprouts produced with the price floor?

Niamat Khuda
Niamat Khuda
Numerade Educator
03:48

Problem 5

The traditional diet of the citizens of the nation of Ironia includes a lot of red meat, and ranchers make up a vital part of Ironia's economy. The government of Ironia decides to support its ranchers through a price floor, which it will maintain by buying up excess meat supplies. Table $6 \mathrm{P}-1$ shows the supply and demand schedule for red meat; quantities are given in thousands of pounds. [LO 6.2$]$
a. How many thousands of pounds of meat would you recommend that the government purchase to keep the price at $\$ 4 /$ pound?
b. How much money should the govemment budect for this proeram?

Niamat Khuda
Niamat Khuda
Numerade Educator
03:32

Problem 6

Suppose you have the information shown in Table $6 \mathrm{P}-2$ about the quantity of a good that is supplied and demanded at various prices. [LO 6.3$]$
a. Plot the demand and supply curves on a graph, with price on the $y$ -axis and quantity on the $x$ -axis.
b. What are the equilibrium price and quantity?
c. Suppose the government imposes a $\$ 15$ per unit tax on sellers of this good. Draw the new supply curve on your graph.
d. What is the new equilibrium quantity? How much will consumers pay? How much will sellers receive after the tax?
e. Calculate the price elasticity of demand over this price change.
f. If demand were less elastic (holding supply constant), would the deadweight loss be smaller or larger? [LO 6.5]

Heather Zimmers
Heather Zimmers
Numerade Educator
05:33

Problem 7

The weekly supply and demand for fast-food cheeseburgers in your city is shown in Figure $6 \mathrm{P}-3 .$ In an effort to curb a looming budget deficit, the mayor recently proposed a tax that would be levied on sales at fast-food restaurants. [LO 6.3]
a. The mayor's proposal includes a sales tax of 60 cents on cheeseburgers, to be paid by consumers. What is the new outcome in this market (how many cheeseburgers are sold and at what price)? Illustrate this outcome on your graph.
b. How much of the tax burden is bome by consumers? How much by suppliers?
c. What is the deadweight loss associated with the proposed tax?
d. How much revenue will the government collect?
e. What is the loss of consumer surplus from this tax?

ED
Ethan Dee
Numerade Educator
07:06

Problem 8

Demand and supply of laptop computers are given in Figure $6 \mathrm{P}-4 .$ The quantity of laptops is given in thousands. Suppose the government provides a $\$ 300$ subsidy for every laptop computer that consumers purchase. [LO 6.4]
a. What will be the quantity of laptops bought and sold at the new equilibrium?
b. What will be the price consumers pay for laptops under the subsidy?
c. What will be the price that sellers receive for laptops under the subsidy?
d. How much money should the government budget for the subsidy?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:07

Problem 9

Suppose government offers a subsidy to laptop sellers. Say whether each group of people gains or loses from this policy. [LO 6.4$]$
a. Laptop buyers.
b. Laptop sellers.
c. Desktop computer sellers (assuming that they are different from laptop manufacturers).
d. Desktop computer buyers.

Madysn Cardinal
Madysn Cardinal
Numerade Educator
02:01

Problem 10

Suppose that for health reasons, the government of the nation of Ironia wants to increase the amount of broccoli citizens consume. Which of the following policies could be used to achieve the goal? $[\mathrm{LO} 6.1,6.4]$
a. A price floor to support broccoli growers.
b. A price ceiling to ensure that broccoli remains affordable to consumers.
c. A subsidy paid to shoppers who buy broccoli.
d. A subsidy paid to farmers who grow broccoli.

Kevin Simons
Kevin Simons
Numerade Educator
05:17

Problem 11

The following scenarios describe the price elasticity of supply and demand for a particular good. In which scenario will a subsidy increase consumption the most? Choose only one. [LO 6.5]
a. Elastic demand, inelastic supply.
b. Inelastic demand, inelastic supply.
c. Elastic demand, elastic supply.
d. Inelastic demand, elastic supply.

Pronoy Sinha
Pronoy Sinha
Numerade Educator
05:17

Problem 12

The following scenarios describe the price elasticity of supply and demand for a particular good. All else equal (equilibrium price, equilibrium quantity, and size of the $\operatorname{tax}$ ), in which scenario will government revenues be the highest? Choose only one. [LO 6.5]
a. Elastic demand, inelastic supply.
b. Inelastic demand, inelastic supply.
c. Elastic demand, elastic supply.
d. Inelastic demand, elastic supply.

Pronoy Sinha
Pronoy Sinha
Numerade Educator