Economics Dr.

Sauer

Review: Government Intervention in Markets 1. In the market for cattle, P = 200 5Q and P = 20 + Q. a. Solve for equilibrium price and quantity. Then illustrate on a graph.

b. Suppose that the government decides that the market price is too low and so mandates that the minimum price will be $60. Is this a price ceiling or floor? Illustrate it on your graph from part a. c. At the new price, calculate the quantity demanded and the quantity supplied. Is there a surplus or a shortage in this market? How much?

d. On your graph from part a, illustrate CS, PS, TS, and DWL after the price control was implemented. Comment on the efficiency and equity of the government intervention.

___________________________________________________________________________________ _ Quantity = Price = 2. On the diagram below, illustrate a $4 tax. Before the tax: Consumer Surplus = Price Producer Surplus = 20 Supply Total Surplus = 18
16 14 12 10 8 6 4 2 Demand 2 4 6 8 10 12 14 16 18 20 Quantity

After the tax: Quantity = Price producers keep = Consumer Surplus = Producer Surplus = Government Revenue = Dead Weight Loss = Total Surplus =

Price =

3. Refer to the graph.

If this nation opens up to trade, will it be an importer or exporter? What quantity will it import or export? Calculate the additional total surplus that results from opening up to trade. If this country opens to trade, how are this countrys consumers affected? Producers?

___________________________________________________________________________________ _ 4. Refer to the Graph. What is the amount of the tax?

Price 15 12 8 9 6 3 40 80 105 120

S2 S1

Calculate government revenue from the tax.

Calculate the total taxes that consumers must bear.

Demand
160 Quantity

Calculate the total taxes that producers must bear.

Which group, consumers or producers, faces the highest tax incidence? What does that tell you about that groups elasticity?

5. Refer to the graphs.

price S

price S

price ceiling

price ceiling D quantity D quantity

Of the graphs above, which accurately depicts an effective price ceiling? On that graph, illustrate the effects of the price ceiling. Then explain in words.

___________________________________________________________________________________ _ 6. Suppose in the Fakelands domestic market for copper, the market equations are given as follows: P = 5Q P = 150 2Q The world price of copper is $90 per ton. a. Calculate domestic equilibrium in Fakeland. Show it on a graph.

b. On your graph, illustrate the world price for copper. c. Calculate the amount that Fakeland imports or exports and show it on your graph. d. Now suppose that the producers of Fakeland lobby their government for protection from imports. They succeed in getting a $10 tariff implemented. Illustrate this on your graph.

e. Calculate the new quantity of imports or exports.

g. Comment on how consumers, producers, the government, and total surplus are affected as a result of the tariff.