BASIC ANALYSIS OF GOVERNMENT POLICIES

    1. Suppose that the diagram to the right depicts the student market for tutoring services.
    a. Indicate in the diagram and compute the value of consumer surplus and producer surplus.
    b. Suppose that government concern over student access to tutoring services results in the imposition of a price ceiling of $3 per tutoring session. Depict the consequences of the price ceiling in the diagram. Does a surplus or shortage result? How large?
    c. Compute the new values for consumer and producer surplus and for the welfare loss associated with the price ceiling. Indicate these areas in the diagram.
    d. Comparing your answers in parts a and c, why do you think consumers might lobby for price ceilings despite the resulting inefficiency?
 
    2. The federal government imposes a price floor in the market for dairy products. The floor is often referred to as a "support price." For dairy products, the government buys up any surplus production which occurs.
    a. Illustrate the effects of a price floor for dairy products in a supply and demand diagram. Indicate in your diagram the quantity of dairy products which is bought up by the government.
    b. Consider the following passage from Business Week magazine: "Says Irvin Elkin, president of the Associated Milk Producers Inc. 'Major cuts in [dairy] support prices run the risk of driving many dairy farmers out of business, which would mean higher milk prices.'" What is probably correct about Elkin's assertion? What is incorrect? Support both answers.
 
    3. Suppose the diagram to the right shows the market for X-rated videocassettes. Suppose that the government imposes a tax of $21 on each X-rated videocassette sold.
    a. Depict in the diagram: (1) the quantity marketed with the tax (Qt), (2) the price buyers pay with the tax (Pbt), and (3) the price sellers receive with the tax (Pst).
    b. Indicate in the diagram each of the following consequences of the tax and calculate the numerical value for each one: (1) the change in consumer surplus, (2) the change in producer surplus, (3) the tax revenues collected by the government, and (4) the change in social welfare.
 
 
 
 

    4. Suppose the diagram to the right depicts the market for health care services (for this problem, ignore recent health reform proposals and just consider health care to be like any ordinary product). Now suppose that the U.S. adopts a system of subsidized national health insurance in which health care services are financed by general tax revenue, and individual patients are not charged for the health care services they individually consume.
    a. Indicate in the diagram: (1) the new quantity demanded of health care (hint: what is the new price paid by individual patients?) and (2) the price health care providers will have to receive to induce them to supply the new quantity demanded (hint: how high is MC at the new quantity demanded?).
    b. Indicate the diagram each of the following consequences of the health insurance program: (1) the change in consumer surplus, (2) the change in producer surplus, and (3) the cost of the program to taxpayers.
 
    5. Mankiw, Chapter 6, Problems and Applications number 8, page 130.

MARKET FAILURE
 
    6. State whether the following is true or false:Vaccinations against contagious diseases are frequently provided to school children at no charge because the vaccinations themselves are free. If false, then why are they provided for free?

    7. The accompanying table shows the supply and demand schedules for pulp paper in the country of Academia:

    8. Mankiw, Chapter 10, Problems and Applications number 5, page 217.
 
MARKET POWER

    9. The diagram to the right represents the situation for a monopoly firm which is trying to decide what price to charge.
    a. Compare producer surplus at the competitive price of $35 with producer surplus at a monopoly price of $40. How much does the producer gain? Explain where this gain comes from.
    b. How much consumer surplus do consumers lose as a result of the monopoly price? Explain why the loss in consumer surplus exceeds the gain in producer surplus.
    c. Would the producer be even better off with a monopoly of $45? Why or why not? Is Adam Smith correct when he says, "The price of monopoly is upon every occasion the highest which can be got"? Explain.
 
    10. Evaluate the following statement: "Monopoly is good for producers but bad for consumers. The gains for producers offset the losses for consumers, so on balance there is no reason to think that monopoly is bad for the economy."

    11. Mankiw, Chapter 15, Problems and Applications number 16, page 335.
 
    12. Answer the following questions based on the supplementary reading, "23 Colleges in East Adjust Aid to Avert Bidding for Students" (the article, "The Rebirth of the Ivy Cartel," contains an update of the situation):
    a. A group of 23 select Eastern colleges have met privately to insure that a student seeking financial aid was offered roughly the same amount by each school in the group. What obstacles must be overcome by any group of sellers attempt to "collude" and "fix" prices?
    b. Which of the obstacles in question 1 are causing difficulty for this specific group of sellers? Cite evidence from the article for support.
    c. Consider the last three paragraphs of the article.
    (1) Do you agree with Pat Waters from Mount Holyoke that "the amount isn't large enough to make anyone change their mind"? If you disagree, why? If you agree, then why do you think Mount Holyoke would offer it?
    (2) Does the financial aid officer quoted in passage A agree with Pat Borders? Explain briefly.
 
INCOME DISTRIBUTION
 
    13. Mankiw, Chapter 18, Problems and Applications number 3, page 399.

    14. Suppose you observe Worker A in Job A earning $45,000 and Worker B in Job B earning $30,000 per year. Explain how each of the following could help you explain the observed income differential. In each case, assume that everything about the two jobs and workers is similar except for the stated difference:
    a. Worker A has 16 years of education, and Worker B has 12 years of education.
    b. The work hours are 2 PM to 11 PM for Job A and 8 AM to 5 PM for Job B.
    c. Worker A is a man; Worker B is a woman.