Problem Set #4
- Define Price elasticity of demand and Price elasticity of supply and explain in words what each of them measures and tells you about the properties of a market
- Give an example of a good we haven’t talked about yet that you think would have very price elastic demand and explain why you think this.
- Give an example of a good we haven’t talked about yet that you think would have very price inelastic demand and explain why you think this
#2) The Impact of Rent Controls: Suppose that the housing market in Menomonie is in equilibrium today. Now suppose that in order to gain student votes in the upcoming election, the new mayor agrees to institute a rent control for all apartments in the city which will cap rents at a maximum of $100 a month. Show the effects of this new policy on a graph AND discuss in a paragraph or two what you think might result from this. (Does this seem like an example of an elastic or inelastic good? Think about how this might affect complimentary or substitute goods, short and long run effects, and who might be helped or hurt by this policy, as well as potential unexpected consequences)
#3) Read the attached article on the Gas Tax which came out in a previous presidential election. Draw a graph of the Gasoline market and show the effect of eliminating an existing tax on gasoline. Based on what is in this article and what you know about elasticity and tax incidence, who would benefit most from a reduction in gas tax … the consumers or the oil companies?
#4) Read the attached articles on proposed junk food/Soda taxes and health food subsidies. Draw a graph of one of these markets and show the effect of one of these policies. What effect is this likely to have on the market, and is this a good or bad idea? Why?
#5) Read the attached article about Christmas gift-giving efficiency and see if you can explain the findings of the article using what we’ve learned about Consumer & Producer Surplus, Deadweight Loss, and value. Have you had similar gift-giving or gift-receiving experiences?