Microeconomics Answers

10. Review the example of the New Jersey cigarette tax (p. 71). Using graph paper or a computer, draw supply and demand curves that will yield the prices and quantities before and after the tax. (Figure 4 -10shows the example for a gasoline tax.) For this example, assume
that the supply curve is perfectly elastic. [Extra credit:A demand curve with constant price elasticity takes
the form Y=AP e, where Y is quantity demanded, P is price, A is a scaling constant, and e is the (absolute value) of the price elasticity. Solve for the values of A and e which will give the correct demand curve for the prices and quantities in the New Jersey example.]

9. No one likes to pay rent. Yet scarcities of land and urban housing often cause rents to soar in cities. In response to rising rents and hostility toward landlords,
governments sometimes impose rent controls. These generally limit the increases on rent to a small year-to-year increase and can leave controlled rents far below free-market rents.
a. Redraw Figure 4 -13to illustrate the impact of rent controls for apartments.
b. What will be the effect of rent controls on the vacancy rate of apartments?
c. What nonrent options might arise as a substitute for the higher rents?
d. Explain the words of a European critic of rent controls: “Except for bombing, nothing is as effi cient at destroying a city as rent controls.” ( Hint: What would happen to maintenance?)

7. Consider what would happen if a tariff of $2000 were imposed on imported automobiles. Show the impact of this tariff on the supply and the demand, and on the equilibrium price and quantity, of American automobiles. Explain why American auto companies and autoworkers often support import restraints on automobiles.

6. A conservative critic of government programs has written, “Governments know how to do one thing well. They
know how to create shortages and surpluses.” Explain this quotation using examples like the minimum wage or interest-rate ceilings. Show graphically that if the demand for unskilled workers is price- elastic, a minimum wage will decrease the total earnings (wage times
quantity demanded of labor) of unskilled workers.

5. Consider a proposal to raise thevminimum wage by 10 percent. After reviewing the arguments in the chapter, estimate the impact upon employment and upon the incomes of affected workers. Using the numbers you have derived, write a short essay explaining how you would decide if you had to make a recommendation on the minimum wage.

4. Consider a competitive market for apartments. What would be the effect on the equilibrium output and price after the following changes (other things held
equal)? In each case, explain your answer using supply and demand.
a. A rise in the income of consumers
b. A $10-per-month tax on apartment rentals
c. A government edict saying apartments cannot rent for more than $200 per month
d. A new construction technique allowing apartments to be built at half the cost
e. A 20 percent increase in the wages of construction workers

3. “The price drops by 1 percent, causing the quantity demanded to rise by 2 percent. Demand is therefore elastic, with E D 1.” If you change 2 to

2. For each pair of commodities, state which you think is the more price-elastic and give your reasons: perfume and salt; penicillin and ice cream; automobiles and
automobile tires; ice cream and chocolate ice cream.

Suppose the price elasticity of demand for Geisha soap is 4. What will be the effect on the quantity demanded for Geisha Soap if price rises by 8%?

Output units R Total cost R
0 100
1 110
2 130
3 166
4 220
5 300

The marginal cost of the fifth unit is _______