Question 1

The market supply function is P = 10 + Q and the market demand function is P = 70 - 2Q. What is the change in consumer surplus associated with a minimum floor price of $40?

Accepted Answer

To find the change in consumer surplus, we need to first find the equilibrium price and quantity, which is where the market supply and demand curves intersect.

Setting the market supply function equal to the market demand function:

10 + Q = 70 - 2Q

Solving for Q:

3Q = 60

Q = 20

Substituting Q = 20 into either the market supply or demand function gives us the equilibrium price:

P = 70 - 2(20) = 30

Now, if there is a minimum floor price of $40, that means the price cannot go below $40. We need to find the new equilibrium quantity, which is where the market supply and demand curves intersect at a price of $40:

10 + Q = 40 - 2Q

Solving for Q:

3Q = 30

Q = 10

So the new equilibrium is at a price of $40 and a quantity of 10.

To find the change in consumer surplus, we first need to calculate the original consumer surplus:

Consumer Surplus = (1/2)(Base)(Height)

Base = 20 (quantity at the original equilibrium price of $30)

Height = (70 - 30) = 40 (difference between the original equilibrium price and the maximum price consumers were willing to pay)

Consumer Surplus = (1/2)(20)(40) = $400

Now, with the new equilibrium price of $40 and quantity of 10, the new consumer surplus is:

Base = 10 (quantity at the new equilibrium price of $40)

Height = (70 - 40) = 30 (difference between the new equilibrium price and the maximum price consumers are willing to pay)

Consumer Surplus = (1/2)(10)(30) = $150

So the change in consumer surplus is:

Change in Consumer Surplus = New Consumer Surplus - Original Consumer Surplus

Change in Consumer Surplus = $150 - $400 = -$250

Thus, the answer is C, which is a decrease in consumer surplus of -$175.

Question 2

Figure 9.4.1 -Refer to Figure 9.4.1 above. Suppose the government raises the price of cheese above the market equilibrium level (P₀) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the deadweight loss of this program?

Accepted Answer

The answer of  Figure 9.4.1
-Refer to Figure 9.4.1 above....

Question 3

Figure 9.4.1 -Refer to Figure 9.4.1 above. Suppose the government raises the price of cheese above the market equilibrium level (P₀) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the cost of this program to the government?

Accepted Answer

The answer of  Figure 9.4.1
-Refer to Figure 9.4.1 above....

Question 4

The market demand and supply functions for milk are:  If a price floor of $1.75 is implemented, calculate the change in producer surplus. How many surplus units of milk are being produced? If the government purchases all the excess units at $1.75, calculate the milk expenditures by government? Does the increase in producer surplus due to the price floor exceed government spending on excess milk?

Accepted Answer

The answer of The market demand and supply functions for...

Question 5

When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, the impact on total welfare is the:

Accepted Answer

The impact on total welfare would be the change in consumer surplus (since consumers would still receive the benefit of the support price) plus the change in producer surplus (since producers are now guaranteed a certain price for their goods) minus the cost to the government (which would have to purchase any unsold inventory). Therefore, option C is the correct answer.

Question 6

Figure 9.4.1 -Refer to Figure 9.4.1 above. Suppose the government raises the price of cheese above the market equilibrium level (P₀) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the change in producer surplus after this policy is adopted?

Accepted Answer

When the government sets a price floor above the market equilibrium and buys up the excess supply, producers gain because they are able to sell more at a higher price. The change in producer surplus includes the gain of areas A (the additional revenue from selling the initial quantity at a higher price) and B (the revenue from selling the excess quantity at the higher price), plus area D (the additional producer surplus from the higher price on the initial quantity). Area C is not lost because it represents consumer surplus at the equilibrium price, which is not directly relevant to the change in producer surplus from this policy.

Question 7

One way to remove the excess labor supply problem from a minimum wage policy is to have the government hire all unemployed workers at the minimum wage. What is the key drawback of this version of a minimum wage policy?

Accepted Answer

The key drawback of the government hiring all unemployed workers at the minimum wage includes both a substantial increase in deadweight loss and a very large cost to the government. Deadweight loss increases because the government's intervention distorts the labor market further, and the cost to the government escalates as it has to finance the wages of all these additional employees, impacting its budget significantly.

Question 8

The market for semiskilled labor can be represented by the following supply and demand curves: L_D = 32000 - 4000W L_S = 8000 + 6000W, where L = millions of person hours per year, and W = the wage in dollars per hour. a. Calculate the equilibrium price and quantity that would exist under a free market. What impact does a minimum wage of $3.35 per hour have on the market? b. The government is contemplating an increase in the minimum wage to $5.00 per hour. Calculate the impact of the new minimum wage on the quantity of labor supplied and demanded. c. Calculate producer surplus (laborers' surplus) before and after the proposed change. Comment on the net effect of the proposed change upon workers as a whole and on individual workers. How does this price floor differ from an agricultural support price? d. Is the policy efficient from an economist's viewpoint?

Accepted Answer

The answer of The market for semiskilled labor can be...

Question 9

What is the difference between a price support and a price floor?

Accepted Answer

A price support involves government intervention to maintain a minimum price by buying up excess supply, whereas a price floor is a legally established minimum price above which the market price cannot fall, but does not necessarily involve government purchase of excess supply.

Question 10

A price support may be pictured by:

Accepted Answer

EPrice supports can be visualized in two ways: A) by shifting the demand curve to the right, which reflects an increase in demand due to government purchases, and E) by drawing a horizontal line at the supported price level, which indicates the minimum price at which the product will be sold, regardless of the market equilibrium.

Question 11

The market demand and supply functions for pork are:  To help pork producers, the U.S. Congress is considering legislation that would put a price floor at $2.25 per unit. If this price floor is implemented, how many units of pork will the government be forced to buy to keep the price at $2.25? How much will the government spend in total? How much does producer surplus increase?

Accepted Answer

The answer of The market demand and supply functions for...

Question 12

A country's government would like to raise the price of one its most important agricultural crops, coffee beans. Which of the following government programs will result in higher prices for coffee beans?

Accepted Answer

All of the options listed would contribute to raising the price of coffee beans. An import quota (A) limits the quantity of coffee beans that can be imported, reducing supply. An acreage limitation program (B) reduces the amount of coffee beans produced domestically by incentivizing farmers to leave some of their land idle, also reducing supply. An import tariff (C) increases the cost of imported coffee beans, making them more expensive and potentially reducing their supply in the domestic market. All these measures reduce the overall supply of coffee beans in the market, which, according to the law of supply and demand, would lead to higher prices.

Question 13

When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, changes in producer surplus:

Accepted Answer

Price support programs typically increase producer surplus because producers receive a guaranteed price for their goods, often above the market equilibrium price. However, this comes at a cost to consumers, who pay higher prices, and the government, which incurs expenses purchasing and storing the surplus goods. The overall effect is that the gains to producers are more than offset by the losses to consumers and the cost to the government.

Question 14

Which of the following is unlikely to occur as a result of a price support program?

Accepted Answer

A price support program typically increases producer surplus by ensuring higher prices for producers, not reducing it.

Question 15

The market supply function is P = 10 + Q and the market demand function is P = 70 - 2Q. What is the change in consumer surplus associated with a minimum floor price of $30?

Accepted Answer

The answer of The market supply function is P =...

Question 16

Consider a competitive market with supply and demand curves expressed as:
Supply P = 5 + 0.036Q Demand P = 50 - 0.04Q,
where P represents unit price in dollars and Q represents sales rate in units per day.
a. Determine the equilibrium price and sales rate.
b. If this were the labor market for low skilled workers, what would be the loss in consumer surplus (purchaser surplus) when the minimum wage is set at $40 per day (an eight hour day)?
c. What is the loss or gain in producer surplus (seller surplus) in part b. above?

Accepted Answer

The answer of Consider a competitive market with supply and...

Question 17

A minimum wage policy induces an:

Accepted Answer

A minimum wage policy sets a wage floor above the market equilibrium, which creates an excess supply of labor (more people want to work than there are available jobs). This is because firms will demand less labor (due to the higher wage) while more workers will be willing to supply labor at the higher wage. This can lead to unemployment and reduced efficiency in the labor market. The other choices are incorrect - a minimum wage policy does not induce excess demand for labor, nor does it necessarily lead to an efficient market outcome or elastic labor supply response.

Question 18

Figure 9.4.1 -Refer to Figure 9.4.1 above. Suppose the government raises the price of cheese above the market equilibrium level (P₀) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the change in consumer surplus after this policy is adopted?

Accepted Answer

When the government raises the price above the market equilibrium level, consumer surplus decreases by the total area of A+B, as consumers have to pay a higher price and they also lose the surplus that they would have received at the market equilibrium price.

Question 19

The demand and supply functions for pizza in the local market are:  and  Calculate consumer and producer surplus in this market. If the minimum wage is increased by $2 per hour, the new market supply curve becomes:  Calculate the loss in consumer and producer surplus in the pizza market due to this change.

Accepted Answer

The answer of The demand and supply functions for pizza...

Question 20

Eliminating price supports for all U.S. agricultural producers will hurt the farmers who cultivate products that have:

Accepted Answer

The answer of Eliminating price supports for all U.S. agricultural...

Quiz 9: The Analysis of Competitive Markets