Microeconomics ECON 1000 Assignment #2 PDF

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From professor Vivek....

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November 27th, 2017

Grace Joan Kiiru (#101084003) ECON 1000 B-03 Assignment

Chapter #7: CONSUMERS, PRODUCERS & THE EFFICIENCY OF MARKETS 2.) *Consider Appendix Graphs A & B* A rise in the demand for French bread, leads to an increase in the producer surplus in the French bread market (as shown in Graph A in appendix). The shift of the demand leads to an increased price, and therefore increases the producer surplus from area A to area A + B + C. For the producer surplus in the flour market, the increased quantity of French bread sold increases the demand for flour (as shown in Graph B in appendix). Because of this, the producer surplus increases from D to D + E + F. Chapter #8: APPLICATIONS OF THE COSTS OF TAXATION 1.) *Consider Appendix Graph C* a.) The equilibrium price is P1, the equilibrium quantity is Q1. Consumer surplus is area A + B + C, while the Producer surplus is D + E + F. By looking at the graph, you can see that there is no deadweight loss, as all the potential gains from the trade are recognized; the total surplus is the entire area between the demand & supply curves. A + B + C + D + E + F. b.) With just a $1 tax on each pizza sold, the price paid by buyers (PB) is now higher than the price received by sellers (PS), where PB = PS + $1. The quantity declines to Q2, the consumer surplus is area A, the producer surplus is area F, government revenue is area B + D, and the deadweight loss is area C + E. Consumer surplus declines by B + C, producer surplus declines by D + E, government revenue increases by B + D, and the deadweight loss increases by C + E. c.) If the tax were to be removed, and consumers and producers voluntarily transferred B + D to the government to make up for the lost tax revenue, then everyone would be better off by not having the tax. The equilibrium quantity would be Q1, as in the case without the tax, and the equilibrium price would be P1. Consumer surplus would be A + C, because consumers get a surplus of A + B + C, then voluntarily transfers to B, to the government. Producer surplus would be E + F, since producers get surplus of D + E + F, then voluntarily transfers to D, to the government. To conclude, both Consumers and Producers are better off without tax, rather than in the case when the tax was imposed. If consumers and producers gave a little bit more than B + D to the government, then all three parties, including the government, would be better off. This illustrates the inefficiency of taxation. Chapter #9: APPLICATIONS OF INTERNATIONAL TRADE 4.) A tariff, is defined as being a tax placed on goods that are produced abroad and sold domestically. If a country is an importer of a good, a tariff reduces the quantity of imported goods and moves the domestic market closer to its equilibrium without trade. This then causes a

reduction in the consumer surplus and total surplus by increasing the price of the goods, while raising the producer surplus and government revenue. Chapter #10: EXTERNALITIES 2.) A negative externality occurs when an individual or firm’s actions, tremendously impacts the well-being of a bystander, without having to the full cost of the decision themselves. If a good has a negative externality, the cost to society is greater than the cost that the consumer is paying for it. For producers, the negative externalities that can occur in the unregulated market, causes them to have lower marginal costs than they would otherwise have, and the supply curve is effectively shifted down to the right of the supply curve that society faces. This is because producers don’t take responsibility for external costs that exist on the unregulated market, which then affect society. With an increase in the supply curve, there is more goods bought than the efficient. Therefore, since marginal benefit is not equal to marginal cost, a deadweight loss results. *Consider Appendix Graph D* For example, pollution can be a form of negative externality. Let’s consider a steel production company; pollutants are pumped and released out into the air, as the steel is being produced. Although firms earn profits, pay expenses, etc., the employees in the factory and local individuals residing near the factory face the consequences of high exposure to pollutants which lead to health complications or even poor quality of breathable air. To illustrate this, consider Graph D, which illustrated the effects of a negative externality. The red line represents society's supply curve/marginal cost curve while the black line represents the marginal cost curve that the firm or industry with the negative externality faces. The optimal production quantity is Q', but the negative externality results in production of Q*. Which as a result, creates a deadweight loss (shown in gray). Chapter #11: PUBLIC GOOD & GOOD RESOURCES 2.) A.) Police Protection: Natural Monopoly; excludable but NOT a rival. Its excludable because some police officers can ignore some neighbourhoods, that appear much safer or have a low crime rate than others. However, it is not a rival, because it they are available, and only forced to overworked, IF the crime rate in an area is rising. Snow Plowing: Common Resource. When the streets are plowed, it is not excludable. However, it is a rival, because after large snowfalls, plowing a street, means not plowing another. Education: Private Good (with a positive externality: where the actions have a positive effect. In this case it’s providing people with knowledge). It’s excludable since in some educational institutions such as universities and colleges can prevent students from taking classes. It is also rival, since one additional student, reduces the benefits of other students in the class. Rural Goods: Public Goods. They are not excludable and NOT rival, since they are uncongested.

City Streets: Common Resources WHEN CONGESTED. City Streets aren’t excludable, since anyone can drive on them. However, they are rival, since congestion is caused by one additional driver slows down the progress of other drivers. Otherwise, if not congested, the city streets are public goods, since there is no rival. Chapter #13: THE COSTS OF PRODUCTION 3.) Marginal Product is the increase in output that occurs from an additional unit of output. To diminish the marginal product, means that the marginal product of an input declines, as the quantity of the input increases....