Exam 6: Market Efficiency and Government Intervention

Suppose that the equilibrium price of a bushel of corn is $0.75 per gallon.The government decides to place a minimum price on corn and will not allow sellers to charge less than $0.90 per bushel.Draw this situation using a graph.Make sure that you show the original equilibrium and the effect of the minimum price on the market.What will happen in this market? What will happen to total surplus?

In an efficient market where buyers and sellers act in their own self-interest,Adam Smith's invisible hand is in action

-Refer to Figure 6.3.If the price of one hour of tutoring is $30,then producer surplus is:

Additional Application Prior to 2001 Canada annually exported billions of board feet of lumber to the U.S.tariff-free.The two countries had followed an agreement in which there would be no restrictions on the lumber from Canadian companies.In March 2001 the agreement ended and in 2002 the U.S.imposed tariffs and duties on imported Canadian lumber.What were the effects of these changes and who gained and who lost? The forestry workers of Canada were hurt.About 15,000 workers lost their jobs in British Columbia and many Canadian towns suffered from the loss of income from lumber sales and related industries.Exports to the U.S.fell from 14.7 billion board feet in 2000 to 20.9 million board feet in 2004.When the lumber prices rose in the U.S. ,the costs of production for home building firms increased. The U.S.government has realized $3.5 billion from the tariffs and that is sitting in the Treasury awaiting resolution of legal disputes.Lumber companies in the U.S.have seen their prices rise with less competition. James Thayer,"Soft Wood,Hard Dispute," The Weekly Standard,November 18,2005.Online -According to this application about the U.S.imposing tariffs on lumber from Canada,if the cost of production for U.S.construction companies increased,then their ________ curve should shift ________.

Suppose that you are willing to pay $25 for a new shirt and the market price is $35.In this case:

When a tax is levied on a good or service:

The amount of a tax shifted forward depends on the price elasticities of supply and demand.

Marty has a collection of Beanie Babies that he is willing to sell for $850.Someone offers him $1,000 for his collection.Calculate Marty's producer surplus.What happens to Marty's producer surplus if someone offers him $1,200 instead?

-Refer to Figure 6.2.If the price of a DVD rental is $2.00,consumer surplus will be $ ________ each week.

There are winners and losers from licensing programs such as a taxi medallion policy.The losers are producers,who receive lower prices for taxi rides.

If the supply of a good is relatively elastic,changing the price causes:

-Figure 6.9 shows the market for tobacco.If the government has no restrictions on imported tobacco,what will be the price of tobacco and the level of tobacco produced? If the government passes a law banning tobacco imports,what happens to the price of tobacco and the quantity of tobacco sold?

All else equal,if supply is relatively elastic and demand is relatively inelastic,a tax on a product will cause:

Assume that there is rent control in Chicago.Which of the following is true?

Recall the application about the response to lower taxes in French restaurants.If the quantity of meals sold will increase due to the lower prices,a tax cut will:

If the government sets a minimum price above the equilibrium price for soybeans.which of the following statements will be correct?

-Figure 6.8 shows the market for taxicab services in a small town.If the government creates a new law limiting taxicab services to 20 per day:

-Refer to Figure 6.2.If the price of a DVD rental is $6.00,consumer surplus will be $ ________ each week.

If the government sets a maximum price for gasoline above the equilibrium price:

-Refer to Figure 6.1.If the price of a donut is $ .75,consumer surplus is: