The government has decided that the free market price of tabacco is too low. a.Suppose the...

The government has decided that the free market price of tabacco is too low.

a.Suppose the government imposes a binding price floor in the tobacco market. Use a supply and demand diagram to show the effect of this policy on the price of tobacco and the quantity to tobacco sold. Is there a shortage or surplus of tobacco? What does the market outcome depend on?

b.Tobacco producers complain that the price floor has reduced their total revenue . Is this possible? Exlpain.

c- In response to producers' complaints, the government agrees to purchase all of the surplus tobacco at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?

Solutions

Expert Solution

There is surplus of good in the market after price floor.

B) yes, it is possible. If demand is Elastic ,then price floor will lead to decrease in total revenue of firm.

C)The sellers benefits from this new policy as there is no surplus of good in the market,they can sell as much they want at price floor.

Buyers loses from this, If government wouldn't buy the Surplus amount ,then seller would have tried to sell good at lower price than price floor in black market, which would result in gain to CONSUMERs. But due goverment action of buying surplus amount at price floor,now seller won't sell lower than price floor.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

- What happens in the free market if the market price is set too high for...

- What happens in the free market if the market price is set too high for the equilibrium price? Draw a graph and explain the reason logically. - As the large-scale wild-fire in California is threatening the Napa Valley--which accounts for 90% of wine supply in the United States--a considerable extent of impact is expected on the wine industry. Analyze the effect of the wild-fire on a market with two goods: wines and wine openers.

QUESTION 18 To say that a price is "too low for equilibrium" means that: A. producers...

QUESTION 18 To say that a price is "too low for equilibrium" means that: A. producers are making substantial profits B. consumers want to pay a lower price than sellers are currently charging. C. there will occur a surplus of the product. D. the amount demanded exceeds the amount supplied. QUESTION 19 A point on a demand curve indicates: A. a particular price and the corresponding quantity demanded by consumers. B. a combination of two consumer goods which buyers will...

Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints.

Regulating a natural monopoly Consider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services and the company's marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves.Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints. Complete the first row of the following table. Suppose that the government forces the monopolist to set the price equal to marginal cost. Complete the second...

The government has decided to add a $10 subsidy in the market for Humbugs. The pre-subsidy...

The government has decided to add a $10 subsidy in the market for Humbugs. The pre-subsidy price of Humbugs was $50, and neither supply nor demand is perfectly elastic nor perfectly inelastic. 1. Which of the following is true? A The price of Humbugs will fall to $40. B The full benefit from the subsidy will go to buyers of Humbugs. C The price of Humbugs will fall by less than $10. D The equilibrium quantity of Humbugs will decrease...

A monopoly creates a deadweight loss because the monopoly sets a price that is too low....

A monopoly creates a deadweight loss because the monopoly sets a price that is too low. makes a normal profit. does not maximize profit. produces less than the efficient quantity. produces more than the efficient quantity. 2. A ________ can price discriminate if, in part, it ________. natural monopoly; is the only seller of a good or service monopoly; can prevent resales of its product monopoly; is the only seller of a good or service perfectly competitive firm; can sell...

1) When a market is missing: consumers' willingness to pay is too low to sustain the...

1)When a market is missing:consumers' willingness to pay is too low to sustain the efficient quantity.the government must create the market artificially.there is the potential for total surplus to increase through the creation of a new market.deadweight loss would increase, but only if more units are exchanged.2)A seller's willingness to sell:is determined by the buyer's willingness to pay.can never be higher than the market price.is determined by the opportunity cost of producing and selling her good.must always be equal to...

Suppose that the local government determines that the price of food is too high and imposes...

Suppose that the local government determines that the price of food is too high and imposes a ceiling on the market price of food that is below the equilibrium price in that locality. Predict some of the consequences of this ceiling

Describe the market for kidney organs, as it would be in a free market without government...

Describe the market for kidney organs, as it would be in a free market without government intervention, using what you have learned about scarcity, marginal analysis in decision-making, and markets. You must include a discussion of resources, supply and demand, as well as marginal benefits and marginal costs. Think of this as an explanation of the pros and cons of the market using economic terminology.

Suppose the government has imposed a price floor on the market for soybeans. Which of the...

Suppose the government has imposed a price floor on the market for soybeans. Which of the following events could transform the price floor from one that is binding into one that is not binding? (x) The number of farmers growing and selling soybeans increases. (y) A change in consumer tastes and preferences increases the number of consumers buying soybeans. (z) A natural disaster occurs in the soybean-growing states. A. (x), (y) and (z) B. (x) and (y) only C. (x)...

9.Pretend GDP is too low (which means there is high unemployment). Explain what the Government (fiscal...

9.Pretend GDP is too low (which means there is high unemployment). Explain what the Government (fiscal policy) and/or the Federal Reserve (monetary policy) would do to solve this problem. (Be specific, and spell it out clearly...) (6 sentences min)

Subjects