Competitive Market Efficiency
(a) draw a diagram depicting the typical supply and demand relationships in a product market.
(b) what is total surplus? Refer to the cost of production and consumer's willingness to pay in your answer.
(c) suppose you are a benevolent dictator of your own country and you are interested in maximizing the total surplus in your country's economy. Suppose you control the quantity that is produced and sold in the market. Graphically illustrate the total surplus associated with 2 randomly chosen quantities in the market (put this on two separate diagrams).
(d) now choose the quantity that maximizes total surplus. Show this quantity on a graph and indicate total surplus.
(e) is this the same quantity that the competitive market would have provided in equilibrium? What are the market forces leading to this quantity?
(f) If your economy is not well-developed SO that there is only one producer of consumer products in your country, is the market outcome likely to be efficient?
Support your answer with a graph.

Problem 2 Competitive Market Equilibrium in the labor market
(a) define a competitive market equilibrium for a representative labor market.
(b) draw a diagram depicting market equilibrium and note the equilibrium wage (w*) and employment level (L*).
(c) if the current wage is above the equilibrium wage, explain why firms and some workers have an incentive to agree to work at a lower wage. (hint: think about unemployment)
(d) if the current is below the equilibrium wage, explain why some firms excess and workers have an wage incentive to agree on a higher wage (hint: think about demand).
(e) is there unemployment in the competitive market equilibrium?
(f) What happens if the government imposes a binding minimum wage in a competitive labor market? Refer to changes in employment and any unemployment that may exist and show this graphically.

Problem 3 Tax Burden
Suppose the government is thinking about imposing higher taxes on fast-food restaurants. As a newly minted economist/policy analyst, you have been hired to analyze the impact of this policy on low-income consumers. Suppose the supply curve for fast-food has the typical upward slope.
(a) suppose low-income consumers are able to easily substitute away from fast-food when prices change. Graphically depict the amount of the fast-food tax that is paid by the low-income consumer.
(b) suppose that in contrast to part a, consumers are not easily able to substitute away from fast food when prices change. Graphically depict the amount of the fast-food tax that is paid by the low-income consumer.
(c) in which case does the consumer bear a higher burden of the tax?
(d) how do these conclusions relate to the price elasticity of demand for fast food?

Problem 4 Analyzing a "sin tax"
Taxes on fast food, alcohol, and tobacco are often levied with two goals in mind: to reduce their consumption and raise government revenue. In this problem we analyze a justification for a sin tax based on efficiency.
(a) Draw a competitive market equilibrium for tobacco assuming the typical down- ward and upward sloping demand and supply curves. Label the equilibrium price and quantity P* and Q*.
(b) What is a consumption externality?
(c) How might tobacco consumption impose an externality?
(d) Redraw the competitive market equilibrium for tobacco and add the marginal social above. benefit function to the graph that properly represents what you described
(e) is the competitive market equilibrium efficient? Identify the dead-weight loss associated with the competitive market equilibrium in your previous graph.
(f) describe a government policy that can reduce the dead-weight loss associated with tobacco consumption.

Problem 5
Price Controls
Suppose a huge snow storm has just hit Tulsa. Let's analyze the market for shovels.
(a) what is likely to happen to the price of shovels?
(b) draw a diagram showing the old and new equilibrium price and quantity for shovels.
(c) Suppose the mayor of Tulsa thinks it is inhumane for the price of shovels to increase because of the storm and scolds firms for "price gouging". The mayor then makes it illegal for shovels to increase in price from their equilibrium price before the storm. What is likely to happen? Will everyone in Tulsa be able to dig out of the storm?
(d) Using the concepts of consumer and producer surplus, show whether the city of Tulsa is worse or better-off because of the mayor's decision in terms of total surplus.

Problem 6 Miscellaneous Short Answer Questions
(a) When is an outcome (allocation) Pareto efficient?
(b) Give two conditions that can cause markets to fail (ie. not produce a Pareto efficient outcome)
(c) Why are monopolies generally harmful to the economy?
(d) Are there cases where a monopoly might not be so bad? (give at least one example where monopoly power has some benefit compared to a competitive market)
(e) Describe a policy remedy for a negative production externality?
(f) Describe a policy remedy for a monopoly?
(g) What is the most efficient way to raise government revenue. Is it feasible?
(h) How can a government raise tax revenue in a per-unit tax while minimizing the size of dead-weight loss.
(i) What is the tragedy of the commons and how does it relate to government regulation of publicly-owned resources?

Competitive Market Efficiency (a) draw a diagram depicting the typ...