Economics

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1. Price ceilings, in the form of rent ceiling, or price floor, in the form of minimum wage, appear to be good initiatives from the government to promote the welfare (well-being) of all. Explain how these price ceilings and price floor work and what they are intended to accomplish. Discuss the possible benefits or drawbacks of these policies in a small essay (10 to 15 sentences), and include a list of your sources (references).

2. It is believed that a single firm operating in perfect competition would only earn zero economic profit in the long run while a firm operating in pure monopoly may maintain an economic profit; why should the market outcome be different in these cases? Explain in 6 sentences.

3. Promoting competition is broadly accepted as a tool to promote consumers’ well-being. Discuss some of the benefits of competition compared to monopoly. What could be some of the drawbacks of competition? Explain in 6 sentences.

4. Let’s consider two smokers A and B who, following a 20%decrease in the price of cigarettes, increase their smoking by 6% and 30% respectively.

a) What is the price elasticity of demand for each consumer? Show all the steps of your calculation to get full credit

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b) Are A’s and B’s consumptions of cigarettes elastic or inelastic? Whom you think is the

occasional smoker and who is the regular smoker (that is, dependent on smoking)? Explain clearly in 2 or more sentences.

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c) Suppose that for a consumer C the price elasticity of demand for cigarettes is equal 1.5. How big will the increasein cigarettes consumed be following a 16 percent decrease in cigarettes’ prices? Show all the steps of your calculation to get full credit.

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d) If you are seller of cigarettes, and you realize that when you lower your price by 24%, your quantity sold are increased by 8% in one market and by 36% in the other market, in which market would your total revenue increase or decrease? Explain, that is, show all the steps that lead to your conclusion.