1.
Many places have policies to protect the poor from high prices of basic necessities such as food and housing. Sometimes the government fixes a maximum price that can be charged for such goods.
a. Draw a supply and demand diagram to illustrate the effects when the government passes a law that fixes a maximum price for bread (be sure to label the axes and curves on your diagram carefully and completely).
b. What are the likely economic effects of this policy?
c. Who benefits and who loses?
d. Can you suggest a more effective nutrition policy?
2. Suppose the annual supply and demand for California iceberg lettuce are characterized by
Demand: Qp=10-0.1P ;
Supply: P=20+10Qs
Quantities are in billions of heads of lettuce per year, and prices are in cents per head. For the competitive equilibrium, label the following elements clearly on a supply and demand diagram, and calculate each element (pay attention to units for prices, quantities, and values). Include your answers in the appropriate place on the attached table:
Quantity of iceberg lettuce sold
Price paid by consumers
Price received by producers
Total producer revenue
Consumer surplus
Producer surplus
Total economic surplus
Elasticity of demand
Elasticity of supply

3. We wish to analyze the economic effects of two changes in the market relative to the equilibrium represented in question 2:
a. An exotic pest destroys a large portion of the romaine lettuce crop (a substitute for iceberg), raising its price.
b. An excellent season results in a bumper crop of iceberg lettuce. Draw a supply and demand model for each of these two changes, and illustrate the nature of the adjustment to the market equilibrium (make sure you label the axes and curves carefully and clearly to distinguish the "before" and "after" positions of the curves and the equilibrium prices and quantities).
In the attached table indicate (with "+" for increase, " for decrease, and "co" for uncertain the direction of change in each of the following variables measured in question 2 in the model of the iceberg lettuce market (do not calculate any numbers for this part):
Quantity of iceberg lettuce sold
Price paid by consumers
Price received by producers
Total producer revenue
Producer surplus
Consumer surplus

4. Return to the base case in question 2, and consider the effects of an excise tax of 5 cents per head of iceberg lettuce, collected from producers. Draw a new supply and demand diagram to illustrate the effects of the tax, and recalculate each of the variables listed in question 2. In addition, calculate the tax revenue raised. Report your results in the table. Describe the effects on welfare of consumers and producers from introducing this tax.

5. Suppose, as an alternative to the excise tax, a sales tax of 5 cents per head of lettuce is collected from buyers. Report the effects in the table. Compare the producer, consumer, taxpayer, and total welfare effects of the sales tax and the excise tax from question 4. If it helps, draw a supply and demand diagram to illustrate your answer.

6. Identify five important events in the history of U.S. agricultural policy and, for each of your five events, say why it was important. Please note that constant dripping wears a stone, and brevity is the soul of wit. Penalties will be imposed for excessively long answers.

1. Many places have policies to protect the poor from high prices...