Chapter 9, The Analysis of Competitive Markets Video Solutions, Microeconomics

Problem 1

From time to time, Congress has raised the minimum wage. Some people suggested that a government subsidy could help employers finance the higher wage. This exercise examines the economics of a minimum wage and wage subsidies. Suppose the supply of lowskilled labor is given by
\[
L^{s}=10 w
\]
where $L^{\mathrm{s}}$ is the quantity of low-skilled labor (in millions of persons employed each year), and $w$ is the wage rate (in dollars per hour). The demand for labor is given by
\[
L^{D}=80-10 w
\]
a. What will be the free-market wage rate and employment level? Suppose the government sets a minimum wage of $\$ 5$ per hour. How many people would then be employed?
b. Suppose that instead of a minimum wage, the government pays a subsidy of $\$ 1$ per hour for each employee. What will the total level of employment be now? What will the equilibrium wage rate be?

Yi Chun Lin

Washington University in St Louis

04:10

Problem 2

Suppose the market for widgets can be described by the following equations:
\[
\begin{array}{cl}
\text {Demand:} & P=10-Q \\
\text {Supply:} & P=Q-4
\end{array}
\]
where $P$ is the price in dollars per unit and $Q$ is the quantity in thousands of units. Then:
a. What is the equilibrium price and quantity?
b. Suppose the government imposes a tax of $\$ 1$ per unit to reduce widget consumption and raise government revenues. What will the new equilibrium quantity be? What price will the buyer pay? What amount per unit will the seller receive?
c. Suppose the government has a change of heart about the importance of widgets to the happiness of the American public. The tax is removed and a subsidy of $\$ 1$ per unit granted to widget producers. What will the equilibrium quantity be? What price will the buyer pay? What amount per unit (including the subsidy) will the seller receive? What will be the total cost to the government?

Zach Steedman

Numerade Educator

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Problem 3

Japanese rice producers have extremely high production costs, due in part to the high opportunity cost of land and to their inability to take advantage of economies of large-scale production. Analyze two policies intended to maintain Japanese rice production:
a per-pound subsidy to farmers for each pound of rice produced, or (2) a per-pound tariff on imported rice. Illustrate with supply-and-demand diagrams the equilibrium price and quantity, domestic rice production, government revenue or deficit, and deadweight loss from each policy. Which policy is the Japanese government likely to prefer? Which policy are Japanese farmers likely to prefer?

Oluwadamilola Ameobi

Numerade Educator

03:46

Problem 4

In $1983,$ the Reagan administration introduced a new agricultural program called the Payment-in-Kind Program. To see how the program worked, let's consider the wheat market:
a. Suppose the demand function is $Q^{D}=28-2 P$ and the supply function is $Q^{s}=4+4 P$, where $P$ is the price of wheat in dollars per bushel, and $Q$ is the quantity in billions of bushels. Find the free-market equilibrium price and quantity.
b. Now suppose the government wants to lower the supply of wheat by 25 percent from the free-market equilibrium by paying farmers to withdraw land from production. However, the payment is made in wheat rather than in dollars-hence the name of the
program. The wheat comes from vast government reserves accumulated from previous price support programs. The amount of wheat paid is equal to the amount that could have been harvested on the land withdrawn from production. Farmers are free to sell this wheat on the market. How much is now produced by farmers? How much is indirectly supplied to the market by the government? What is the new market price? How much do farmers gain? Do consumers gain or lose?
c. Had the government not given the wheat back to the farmers, it would have stored or destroyed it. Do taxpayers gain from the program? What potential problems does the program create?

Doris Bennett

Numerade Educator

02:50

Problem 5

About 100 million pounds of jelly beans are consumed in the United States each year, and the price has been about 50 cents per pound. However, jelly bean producers feel that their incomes are too low and have convinced the government that price supports are in order. The government will therefore buy up as many jelly beans as necessary to keep the price at $\$ 1$ per pound. However, government economists are worried about the impact of this program because they have no estimates of the elasticities of jelly bean demand or supply.
a. Could this program cost the government more than $\$ 50$ million per year? Under what conditions? Could it cost less than $\$ 50$ million per year? Under what conditions? Illustrate with a diagram.
b. Could this program cost consumers (in terms of lost consumer surplus) more than $\$ 50$ million per year? Under what conditions? Could it cost consumers less than $\$ 50$ million per year? Under what conditions? Again, use a diagram to illustrate.

Doris Bennett

Numerade Educator

02:16

Problem 6

In Exercise 4 in Chapter 2 (page 86 ), we examined a vegetable fiber traded in a competitive world market and imported into the United States at a world price of $\$ 9$ per pound. U.S. domestic supply and demand for various price levels are shown in the following table.
Answer the following questions about the U.S. market:
a. Confirm that the demand curve is given by $Q_{D}=40-2 P,$ and that the supply curve is given by $Q_{s}=2 / 3 P$
b. Confirm that if there were no restrictions on trade, the United States would import 16 million pounds.
c. If the United States imposes a tariff of $\$ 3$ per pound, what will be the U.S. price and level of imports? How much revenue will the government earn from the tariff? How large is the deadweight loss?
d. If the United States has no tariff but imposes an import quota of 8 million pounds, what will be the
U.S. domestic price? What is the cost of this quota for U.S. consumers of the fiber? What is the gain for U.S. producers?

Doris Bennett

Numerade Educator

03:00

Problem 7

The United States currently imports all of its coffee. The annual demand for coffee by U.S. consumers is given by the demand curve $Q=250-10 P,$ where $Q$ is quantity (in millions of pounds) and $P$ is the market price per pound of coffee. World producers can harvest and ship coffee to U.S. distributors at a constant marginal $(=\text { average })$ cost of $\$ 8$ per pound. U.S. distributors can in turn distribute coffee for a constant
$\$ 2$ per pound. The U.S. coffee market is competitive. Congress is considering a tariff on coffee imports of $\$ 2$ per pound.
a. If there is no tariff, how much do consumers pay for a pound of coffee? What is the quantity demanded?
b. If the tariff is imposed, how much will consumers pay for a pound of coffee? What is the quantity demanded?
c. Calculate the lost consumer surplus.
d. Calculate the tax revenue collected by the government.
e. Does the tariff result in a net gain or a net loss to society as a whole?

Alejandro Ruiz

Numerade Educator

02:37

Problem 8

A particular metal is traded in a highly competitive world market at a world price of $\$ 9$ per ounce. Unlimited quantities are available for import into the United States at this price. The supply of this metal from domestic U.S. mines and mills can be represented by the equation $Q^{s}=2 / 3 P$, where $Q^{s}$ is U.S. output in million ounces and $P$ is the domestic price. The demand for the metal in the United States is $Q^{\mathrm{D}}=40-2 P$, where $Q^{\mathrm{D}}$ is the domestic demand in million ounces.

In recent years the U.S. industry has been protected by a tariff of $\$ 9$ per ounce. Under pressure from other foreign governments, the United States plans to reduce this tariff to zero. Threatened by this change, the U.S. industry is seeking a voluntary restraint agreement that would limit imports into the United States to 8 million ounces per year.
a. Under the $\$ 9$ tariff, what was the U.S. domestic price of the metal?
b. If the United States eliminates the tariff and the voluntary restraint agreement is approved, what will be the U.S. domestic price of the metal?

Manasvee Singh

Numerade Educator

06:43

Problem 9

Among the tax proposals regularly considered by Congress is an additional tax on distilled liquors. The tax would not apply to beer. The price elasticity of supply of liquor is $4.0,$ and the price elasticity of demand is $-0.2 .$ The cross-elasticity of demand for beer with respect to the price of liquor is 0.1
a. If the new tax is imposed, who will bear the greater burden-liquor suppliers or liquor consumers? Why?
b. Assuming that beer supply is infinitely elastic, how will the new tax affect the beer market?

Khalida Dawar

Numerade Educator

03:59

Problem 10

In Example 9.1 (page 330 ), we calculated the gains and losses from price controls on natural gas and found that there was a deadweight loss of $\$ 5.68$ billion. This calculation was based on a price of oil of $\$ 50$ per barrel.
a. If the price of oil were $\$ 60$ per barrel, what would be the free-market price of gas? How large a deadweight loss would result if the maximum allowable price of natural gas were $\$ 3.00$ per thousand cubic feet?
b. What price of oil would yield a free-market price of natural gas of $\$ 3 ?$

Daniel Cisneros

Numerade Educator

01:21

Problem 11

Example 9.6 (page 357 ) describes the effects of the sugar quota. In 2011 , imports were limited to 6.9 billion pounds, which pushed the domestic price to 36 cents per pound. Suppose imports were expanded to 10 billion pounds.
a. What would be the new U.S. domestic price?
b. How much would consumers gain and domestic producers lose?
c. What would be the effect on deadweight loss and foreign producers?

Srikar Katta

Numerade Educator

09:36

Problem 12

The domestic supply and demand curves for hula beans are as follows:
\[
\begin{aligned}
\text {Supply:} & P=50+Q \\
\text {Demand:} & P=200-2 Q
\end{aligned}
\]
where $P$ is the price in cents per pound and $Q$ is the quantity in millions of pounds. The U.S. is a small producer in the world hula bean market, where the current price (which will not be affected by anything we do) is 60 cents per pound. Congress is considering a tariff of 40 cents per pound. Find the domestic price of hula beans that will result if the tariff is imposed. Also compute the dollar gain or loss to domestic consumers, domestic producers, and government revenue from the tariff

Sam Low

Numerade Educator

02:12

Problem 13

Currently, the social security payroll tax in the United States is evenly divided between employers and employees. Employers must pay the government a $\operatorname{tax}$ of 6.2 percent of the wages they pay, and employees must pay 6.2 percent of the wages they receive. Suppose the tax were changed so that employers paid the full 12.4 percent and employees paid nothing. Would employees be better off?

Tommy Nguyen

Numerade Educator

02:55

Problem 14

You know that if a tax is imposed on a particular product, the burden of the tax is shared by producers and consumers. You also know that the demand for automobiles is characterized by a stock adjustment process. Suppose a special 20 -percent sales tax is suddenly imposed on automobiles. Will the share of the tax paid by consumers rise, fall, or stay the same over time? Explain briefly. Repeat for a 50 -centsper-gallon gasoline tax.

Md.Daniyal Arshad

Numerade Educator

16:46

Problem 15

In $2011,$ Americans smoked 16 billion packs of cigarettes. They paid an average retail price of $\$ 5.00$ per pack.
a. Given that the elasticity of supply is 0.5 and the elasticity of demand is $-0.4,$ derive linear demand and supply curves for cigarettes.
b. Cigarettes are subject to a federal tax, which was about $\$ 1.00$ per pack in $2011 .$ What does this tax do to the market-clearing price and quantity?
c. How much of the federal tax will consumers pay? What part will producers pay?

Oluwadamilola Ameobi

Numerade Educator