In praise of price gouging

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Reference no: EM13759

1. In John Stossel's article, "In Praise of Price Gouging", Stossel argues that a law banning price gouging would result in a two-block line for gasoline after Superstorm Sandy.

a. Explain in words and using a graph why the ban on price gouging may cause a long line for gasoline. Label the axis and all the lines. Be precise.

b. Has supply changed, demand changed, or both? Explain.

c. Using two graphs, show consumer surplus before and after government intervention. Be precise. Label the axis and all the lines.

2.? Answer the following questions based on the graph that represents J.R.'s demand for ribs per week at Judy's Rib Shack.

a.  How high must the price of ribs be for Judy to supply 20 ribs to the market?

b.At the equilibrium price, what is the magnitude of total surplus in the market? Show all the steps.

c. If the price of ribs fell to \$5, what would happen to Judy's producer surplus? Explain why. Be precise.

d. Using your words, explain why the graph verifies the fact that the market equilibrium maximizes the sum of producer and consumer surplus.

e. What happens to the quantity consumed in this market if the government imposes a price-ceiling equal to \$1? Using words, explain why.

3. Suppose D1 represents the demand curve for paperback novels, D2 represents the demand curve for gasoline,S1 represents the supply curve for paperback novels and S2 represents the supply curve for gasoline. Afterthe imposition of a \$2 tax on paperback novels and on gasoline, the

a. sellers of gasoline bear a higher burden of the \$2 tax than sellers of paperback novels.

b. buyers of gasoline bear a higher burden of the \$2 tax than buyers of paperback novels.

c. buyers of gasoline bear an equal burden of the \$2 tax as buyers of paperback novels.

d. Both a) and b) are correct.

4.1

Suppose the US and Mexico both produce semiconductors and auto parts and the US has a comparative advantage in semiconductors while Mexico has a comparative advantage in auto parts. Also suppose the UShas an absolute advantage in the production of both semiconductors and auto parts. The US should:

a. not trade semiconductors and auto parts with Mexico.

b. export semiconductors to Mexico and import auto parts from Mexico.

c. import semiconductors from Mexico and export auto parts to Mexico.

d. export both semiconductors and auto parts to Mexico.

4.2 Using words, explain why. Be precise.

5. a. The US government decides to subsidize solar panels. For each unit sold, the government pays \$T to the buyer. Using a graph, show how this subsidy affects i) consumer surplus, ii) producer surplus, iii) tax revenue and iv) total surplus. To get credit, please label the axis, all the lines and mark with letters the relevant areas.

b. Does the subsidy lead to deadweight loss? If it does, show the deadweight loss in the graph and explain using your words why a deadweight loss might arise. If the subsidy does not lead to deadweight loss, explain why.

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