Problem set 3

Problem set #3
Due on Monday, March 19th by 5:00 p.m. in the inbox outside of Hillcrest 214.

  1. You are an economic consultant to a member of Congress.  Someone has just introduced a bill that will impose a $50 carbon tax, which will of course affect the market for home heating oil.  Would you expect the entire tax to be paid by consumers?  If your job were to determine who bears the burden of the tax, what information would you collect?  Justify your answer.
  2. Read this article about the future of the energy market and then use our models to illustrate how the developments in this article will improve social welfare. Do you think that government policies are required to accelerate the trends mentioned in this article?  Why or why not?
  3. Demonstrate how a binding price floor is like a tax on consumers and a subsidy to suppliers
    1. Who gets the revenue in the case of a tax?  Label the area that illustrates a tax
    2. Who gets he revenue in the case of a price floor? Label the transfer of surplus from consumers to suppliers
    3. Label the welfare loss associated with the tax and with the price floor.
  4. Listen to this recent report about the minimum wage, review our class reading on the subject, and then make your case: should the USA increase its minimum wage or not? Use our models to make your case.
  5. Suppose the weekly demand curve for wristwatches in Lincoln, Nebraska is given by the equation P = 12 – 0.25Q, and the weekly supply of wristwatches is given by the equation P = 6 + 0.75Q, where P is the dollar price of a wristwatch.  Sketch these demand and supply curves and then calculate:a.  Consumer surplusb.  Producer surplus
  6. Under what conditions will the deadweight loss from an import tariff be relatively small? Under what conditions will they be relatively large?  Justify your answer using a graphical model.
  7. Mankiw – Problems and Applications, Chapter 9. Problem 11 (p. 191 in the 6th Edition.)
  8. When President Bush backed an import quota on foreign steel, Steven Landsburg, an economist at the University of Rochester, wrote the following in the New York Times:

    Free trade is not only about the right of American consumers to buy at the cheapest possible price; it’s also about the right of foreign producers to earn a living. Steelworkers in West Virginia struggle hard to make ends meet. So do steelworkers in South Korea. To protect one at the expense of the other, solely because of where they happened to be born, is a moral outrage.

    A few days later, Tom Redburn published an article disagreeing with Landsburg:

    It is not some evil character flaw to care more about the welfare of people nearby than about that of those far away — it’s human nature. And it is morally — and economically — defensible. … A society that ignores the consequences of economic disruption on those among its citizens who come out at the short end of the stick is not only heartless, it also undermines its own cohesion and adaptability. Indeed, the more efficiently the machinery of the market has operated in recent years, the more those who see themselves as its victims have tried to throw sand in the gears.

    How does an import quota allow the US government to protect steelworkers in West Virginia at the expense of steelworkers in South Korea? Is Landsburg making a positive or a normative statement? Based on these opinions and our reading material, do you tend to support barriers to international trade? Make your case with our models and with other analytical tools.

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