ES2550: Project

ES2550: Project

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Project Introduction:

Different economic studies estimate the price elasticity of demand for certain goods, some of

which are reported on page 176 of the Hubbard/O’Brien textbook. The following table presents

select elasticity of demand estimates from those reported on page 176.

Product Estimated Elasticity

Barnes & Noble books -4.00

Coca-Cola -1.22

Cigarettes -0.25

Beer -0.23

Gasoline -0.06

Part 1: In your project, address the following questions:

Using the elasticity estimates in the table above, classify the price elasticity

demand as elastic or inelastic. Explain your reasoning.

Explain the implications of those classifications on tax revenue collections when

the per-unit tax increases as opposed to decreases.

Using those classifications, make some assumptions regarding tax incidence. For

instance, will buyers or sellers pay a larger portion of the tax per unit? Explain.

Based on the elasticity classifications, their effect on tax revenue, and tax

incidence, which goods would the government prefer to tax?

Part 2: In your project, address the following questions in this order:

Using the ITT Tech Virtual Library, research tax rates imposed on cigarettes for

the state in which you reside and two surrounding states. Discuss the changes in

tax rates on cigarettes in those states over the last few years. Predict the

implication of this tax rate change on tax revenue according to theory.

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Research the effect of changes in cigarette taxes on tax revenue for a state. Does

this change indicate cigarettes have an elastic or inelastic demand in that state?

Support your answer.

Course Objectives Tested:

1. Explain key microeconomic terminology.

3. Create and use economic graphs and numerical models to analyze and solve

microeconomic problems.

5. Analyze the impact of government activity in markets.

6. Determine optimal consumer buying decisions in the context of utility theory.

PROJECT DESCRIPTION —PART 2 (4.0 HOURS)

Project Introduction:

Suppose that the U.S. currently buys and produces wingdings, a fictitious economic

good. The U.S. faces the world price, and domestic suppliers sell as many wingdings as

possible at the world price. Now, the government succumbs to lobbying by wingding

producers and imposes a protective tariff on wingdings amounting to $2 per wingding.

The graph below represents this situation.

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World Price

World Price + Tariff

U.S. Supply

U.S. Demand

Price

Quantity (millions of pounds) 6 12 16 18 26

6

8

10

4

Market for Wingdings

Part 1: Answer the following questions. Use formulas and show calculations as well as

final answers.

a. Does the United States have a comparative advantage in wingdings? Explain.

b. Discuss the effect of the tariff on the number of imports.

c. How did the imposition of the tariff change consumer surplus?

d. How did the imposition of the tariff change producer surplus?

e. What is the overall result of the tariff in terms of welfare?

Part 2: Allowing free trade between countries can be beneficial, but it also imposes

costs. Use the ITT Tech Virtual Library to research the costs and benefits of allowing free

trade. Discuss aspects of free trade that some may consider unfair. For example:

a. Distribution of costs and benefits of free trade. In other words, does everyone

share in the gains and the costs equally?

b. Competing with different labor restrictions (or lack thereof), such as slave or

child labor.

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c. Differences in environmental standards.

Part 3: Research trade between the United States and another country in any one of the

following areas: customer support services, garments, medical services, or technical

products. Discuss the following points:

a. How is this trade arrangement beneficial? Explain.

b. Are there any aspects of this trade arrangement that may be considered unfair,

i.e. labor conditions or environmental conditions?

c. Discuss a possible solution for minimizing harms mentioned in part b.

Course Objectives Tested:

1. Explain key microeconomic terminology.

3. Create and use economic graphs and numerical models to analyze and solve

microeconomic problems.

4. Explain the costs and benefits of international trade, including calculation of gains from

trade.

7. Compare and contrast optimal pricing and output decisions in various market

structures.

8. Apply supply and demand theory to both product and factor markets.

PROJECT DESCRIPTION —PART 3 (6.0 HOURS)

Project Introduction:

Research and analyze the effects of the following government policies on the market

equilibrium.

Increases in the Minimum Wage

Restrictions on International Trade

Pollution Controls

Natural Monopolies and Anti-Trust Regulation

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When analyzing these policies, include some discussion of the following points when

appropriate:

What is the purpose of the policy?

Provide the rationale for the government policy. In this section, discuss how

asymmetric information creates a need for the policy.

Note 1: The necessity of the policy should be related to the purpose.

Note 2: A discussion of asymmetric information should include defining how the

information is unequal between consumers and producers as well as any adverse

selection or moral hazard issues involved.

The welfare of consumers, producers, and society (the winners and losers)

before and after the policy.

How does this policy affect the fairness of the distribution of costs and benefits?

Does government intervention improve the situation?

Note: Discuss whether government intervention affected the asymmetric information problem,

adverse selection, or moral hazard previously discussed.

Course Objectives Tested:

1. Explain key microeconomic terminology.

2. Differentiate between microeconomics and macroeconomics.

3. Create and use economic graphs and numerical models to analyze and solve

microeconomic problems.

4. Explain the costs and benefits of international trade, including calculation of gains from

trade.

5. Analyze the impact of government activity in markets.

6. Determine optimal consumer buying decisions in the context of utility theory.

7. Compare and contrast optimal pricing and output decisions in various market

structures.

8. Apply supply and demand theory to both product and factor markets.

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PRO JECT SUBM ISSIO N P L AN

Project

Part

Description/Requirements of Project Part

1 Determine How Elasticity Affects the Government’s Decision to Tax Certain

Goods

Submission Requirements:

Submit all work in one Word document (minimum of 600 words).

Times New Roman 12-point font.

Formulas and calculations must be shown along with the final correct

answer.

Formal references in APA format must be provided.

This submission must be paraphrased in your own words. Adhere to

the academic honesty policy.

No more than 10% of your document can be quoted. Avoid

answering any of the questions with a quote. Quotes should support

your discussion instead of answering questions for you.

Due: Week 5

Grading Weight: 5%

2 Comparative Advantage and Restrictions on International Trade

Submission Requirements:

Submit all work in one Word document (minimum of 600 words).

Times New Roman, 12-point font.

Formulas and calculations must be shown along with the final correct

answer.

Formal references in APA format must be provided.

This submission must be paraphrased in your own words. Adhere to

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Project

Part

Description/Requirements of Project Part

the academic honesty policy.

No more than 10% of your document can be quoted. Avoid

answering any of the questions with a quote. Quotes should support

your discussion instead of answering questions for you.

Adhere to the academic honesty policy.

Due: Week 7

Grading Weight: 5%

3 Discuss the Effect of Government Policies

Submission Requirements:

Attach a Word document of 750 minimum words with an

introduction and a conclusion.

Format: Double line space, Times New Roman, 12-point font

Formal references in APA format must be provided.

This submission must be paraphrased in your own words. Adhere to

the academic honesty policy.

No more than 10% of your document can be quoted. Avoid

answering any of the questions with a quote. Quotes should support

your discussion instead of answering questions for you.

Due: Week 10

Grading Weight: 5%

(End of Project Description)