Written Assignment 2/Jimmy Morgan-Principles of Microeconomics N.

. Gregory Mankiw- Fifth Edition ISBN 0324-58998-0)I Answer all of the following questions. Title your assignment "Written Assignment 2," unless your mentor directs otherwise. This assignment covers text chapters 7 through 12. 1. Answer each of the following questions on supply and producer surplus. a. What is producer surplus, and how is it measured? Producer surplus is the amount a producer benefits monetarily from selling a product at a price above the amount it cost to make the product. Producer surplus is measured as the difference that a producer is willing and able to supply a product for and the price the producer actually gets paid for the product. It is the amount or level or producer surplus is shown above the supply curve and below the market price. b. What is the relationship between the cost to sellers and the supply curve? Producers take into account several factors before producing a product: land, labor, and capital to make the product they want to sell. In producing said good, cost are going to be incurred and the price received by the sellers should be a combination of what it cost to produce the product and sometimes a profit. So lets say a producer wants to increase the amount they want to produce, they are going to incur some additional costs of the raw materials needed to make the increase of the product. The supply curve shows the quantity supplied as a function of the price it is provided. A movement along the supply curve to a new quantity represents the effect of a change in price. c. Other things equal, what happens to producer surplus when the price of a good rises? An increase in the price of a good would basically cause an increase in producer surplus. Some producers, producing at Q1 and selling at P1 may not feel the surplus and may start receiving more for the products they sell 2. There are four consumers willing to pay the following for a haircut: Consumer Willing to Pay: Ricki Oprah Jerry Montel $8.00 $7.00 $5.00 $2.00

3. And there are four businesses with the following cost per haircut: Business Haircut Price: A Kutz B Kutz C Kutz D Kutz $3.00 $6.00 $4.00 $2.00

4. Each business can produce no more than one haircut. a. In the most efficient world, which companies should cut hair and which customers should get a haircut? (Note: It might be less than 4.) Ricki, Oprah, Jerry and Montel should all get a hair cut from D Kutz because this business offers the greatest consumer surplus or and the price that the marginal buyer would spend of $2.00. All other business should not cut being in the hair cutting business because they are not able to produce a haircut at the same price as D Kutz therefore the consumer will not choose them. b. How large is the maximum possible total surplus and what is the least possible surplus? The maximum possible surplus is $6.00 and the least possible surplus is $2.00. 5. Explain Arthur Laffers theory of tax rates relative to tax revenue. What is the effect of a tax on the deadweight loss? Why is it sometimes difficult to predict what will happen when a tax rate is decreased or increased? The Laffers theory argued that tax revenues are related to the tax rate to a point that no revenue is generated at a tax rate of either zero or one hundred per cent. He believed that if tax rates were lowered it would motivate people to work more in turn generating more taxable revenue. He stated, Other things equal, a tax cut is more likely to raise tax revenue if the cut applies to those tax payers facing the highest tax rates. (Mankiw, 5th Ed., pg. 171). A tax on deadweight causes consumers and sellers to change their behavior about buying and how much of a good produce to sell. Because tax rate increases and decreases affect consumers and sellers differently, it is hard for economists to figure out just what will happen. Take for instance, a labor tax increase or decrease may motivate on person to work more hours, get another job whereas another person may look at it as why am I working so much just to pay more taxes. 6. Describe both quotas and tariffs. How do they impact domestic prices and deadweight loss? How does an import quota differ from an equivalent tariff? What is best for a nation as a whole: a tariff, a quota, or free trade? Explain your answer. Quatos are limitations on the quantity of a good that can be imported into a country during a specified period. An import quota is normally set below the free trade level of imports. A tariff is a tax set on a good that is imported and sold domestically. A tariff is normally imposed to discourage consumers from purchasing foreign goods. When a

tariff tax is imposed, domestic sellers benefit and domestic, consumer are worse off because sellers increase prices to offset the tariff and consumers pay more for the product because of the tariff. By imposing a tariff tax, government in some cases raise revenue. Tariff on deadweight loss causes domestic producers to increase production of a product even though the domestic price of the product rises above the world price. because it is profitable. On the other hand, it causes consumers to decrease their purchases of the product. Import quotas are restrictions set by the government on a particular good that is imported. Import quotas raise revenue for those who hold a license to import. I believe that as a whole both tariffs/quotas restrict trade and raise prices for consumers however I believe a tariff is better than a quota because a tariff increases economic prosperity for the seller, which leads to a more productive economy. 7. Although most economists agree that free trade is beneficial for a country, there are numerous arguments against free trade. Describe five of the arguments against free trade. 1. Some people argue that free trade destroys jobs of that country. When a country begins to import a product for a lower price than it is produced domestically, the price of the product, of course would fall causing the domestic companies to have to lay off workers causing a rise in the unemployment numbers. 2. Another argument is that free trade increasing offshore outsourcing. They believe that the environmental and labor restrictions imposed on these companies can and most of the time will be less in foreign production making it very difficult for domestic companies to compete. They argue that free trade would allow companies to circumvent domestic regulations, by producing elsewhere. 3. A third argument is the threat of national security. Some believe that if they allow free trade of a product that is primarily used by its military, they could become dependent on that country and if conflict was to arise, and import capabilities were interrupted, they might not be able to attain enough of the material to make whatever weapon system needed to defend itself. Others argue, which in my opinion is a greater concern, farm subsidies. People also argue the threat of bioterrorism and even unintentional diseases, entering a country because of free trade because of poor inspection policies. 4. Some people believe that protecting our infant industries may pay-off in the long run. They believe that imposing a temporary trade restriction would allow new industries to get started without having to compete in the global market with the larger more established firms. My only question is, How will we know if the business will be successful or not? 5. Some even argue that restricting free trade gives countries leverage when and if they want to trade with another country. They claim, The threat of a trade restriction can help remove a trade restriction already imposed by a foreign government. (N. Gregory Mankiw, 5th Ed., pg. 191). 8. Describe the Coase theorem, which suggests that efficient solutions to externalities can be arrived at through bargaining. Explain how this happens. Under what circumstances does bargaining fail to produce a solution? The Coase theorem argues that the private sector can solve a problem dealing with externalities among

themselves. He believes that no matter who holds the initial distribution of rights, both parties will, 100% of the time, reach a bargain on how to handle the externality and the situation will turn out efficient for both parties. Take for instance four families living in a four-plex apartment. Three of the families have no children but one of the families has two very active children who tend to play in the common area hallway of the apartment during unposted quit hours. Now, the other three families could try to enforce the unposted quit hours by involving an outside agency or simply bargain with the family to try to keep the children inside their apartment during quit hours. The other three families could also offer to buy a play area for the children and set it up outside where they will not be heard while playing. The cost benefit of the family to have their children indoors so one of the parents will not have to be outside watching the children while they play is $600.00 however the cost benefit to the other three families is $900.00. All parties agree to pay $750.00, which includes a portable play area and a nanny who comes by after work and watches the children play while the family gets some rest. All parties are better off than they were before and an efficient outcome is reached. Now this would not have worked if all parties were not rational people who believe in neighbors living in perfect harmony. It also would not have worked if the three families without children did not value their quit time very much. If the family with the children said that, they had, rights to use the common areas just like anyone else and their children were not bothering anyone then the families without children would probably not be able to reach an effective bargain. 9. Why do wild salmon populations face the threat of extinction while pet goldfish populations are in no such danger? Wild salmon in many countries have a commercial value while gold fish, not so much. Many people fish for salmon and other than a countrys regulations against the time of the year you can fish and purchasing a fishing license, what stops those people who do not fear a countrys laws from fishing as much as they want? The oceans are a large area and many different counties have access to them. Our book tells us it would take international cooperation which is also very difficult since many countries have different views on natural resources. Many countries major economic business is the sell of fish. 10. Define and explain the terms income tax and consumption tax. What would be the benefits of taxing consumption and not income? Income tax is a tax on the income of a person or business. It is the largest source of revenue for the federal government. With the income tax, each family is required to report to the federal government all wages earned from working, the savings you earned on money saved, etc. The amount of income tax a person or a firm pays in taxes is based on the total amount earned (profit). There are many variables that come into to play when calculating how much each individual or business pays from the size of a individual family to how much money was paid out for salaries. A consumption tax is a tax that is paid on good and services that are purchased. It refers to a system with a tax base consumption. It is a tax on what people spend instead of what they earn. It can also be considered as a form of direct, personal taxation as an income tax that primarily excludes investments

and savings. Consumption taxes and not regressive in some cases however they are regressive on income depending on how much a person spends. The benefit will be to the tax payer. By taxing consumption, the individual controls how much they are taxed. They would control their own consumption and the benefits would be enormous. 11. List the federal government's three most important sources of tax revenue. How do these differ from your state government's three most important sources of tax revenue and those of local government? Why do you think that these different government entities use different tax bases? The Federal Government three most important sources of tax revenue are income tax, social security tax, and corporate tax. Individuals and businesses are taxed by the federal government at varying rates depending on their income level, size of household, etc. Social Security taxes are used primarily to pay for the living standards of the elderly. State and local governments use a variety of taxes to raise revenues as well. State governments favor sales taxes, excise taxes and personal income taxes, whereas local governments predominately rely on property taxes. On the surface it appears that raising revenues is a fair process however state and local government officials adopt a tax or change an existing rate and the required revenues are obtained. I believe that federal, state, and local governments use different tax bases to meet their responsible area requirements.
Written Assignment 2/Jimmy Morgan-Principles of Microeconomics N. Gregory MankiwFifth Edition ISBN 0324-58998-0)I Answer all of the following questions. Title your assignment "Written Assignment 2," unless your mentor directs otherwise. This assignment covers text chapters 7 through 12. 1. Answer each of the following questions on supply and producer surplus. a. What is producer surplus, and how is it measured? Producer surplus is the amount a producer benefits monetarily from selling a product at a price above the amount it cost to make the product. Producer surplus is measured as the difference that a producer is willing and able to supply a product for and the price the producer actually gets paid for the product. It is the amount or level or producer surplus is shown above the supply curve and below the market price. correct b. What is the relationship between the cost to sellers and the supply curve? Producers take into account several factors before producing a product: land, labor, and capital to make the product they want to sell. In producing said good, cost are going to be incurred and the price received by the sellers should be a combination of what it cost to produce the product and sometimes a profit. So lets say a producer wants to increase the amount they want to produce, they are going to incur some additional costs of the raw materials needed to make the increase of the product. The supply curve shows the quantity supplied as a function of the price it is provided. A movement along the supply curve to a new quantity represents the effect of a change in price. correct c. Other things equal, what happens to producer surplus when the price of a good rises? An increase in the price of a good would basically cause an increase in producer surplus. Some

producers, producing at Q1 and selling at P1 may not feel the surplus and may start receiving more for the products they sell correct 2. There are four consumers willing to pay the following for a haircut: Consumer Ricki Oprah Jerry Montel Willing to Pay: $8.00 $7.00 $5.00 $2.00

3. And there are four businesses with the following cost per haircut: Business Haircut Price: A Kutz B Kutz C Kutz D Kutz $3.00 $6.00 $4.00 $2.00

4. Each business can produce no more than one haircut. a. In the most efficient world, which companies should cut hair and which customers should get a haircut? (Note: It might be less than 4.) Ricki, Oprah, Jerry and Montel should all get a hair cut from D Kutz because this business offers the greatest consumer surplus or and the price that the marginal buyer would spend of $2.00. All other business should not cut being in the hair cutting business because they are not able to produce a haircut at the same price as D Kutz therefore the consumer will not choose them. Supply equals demand at the quantity of three haircuts and a price between $4 and $5. Firms A, C, and D should cut the hair of Riki, Oprah, and Jerry. Montels willingness to pay is too low and firm Bs costs are too high, so they do not participate. The maximum total surplus is the area between the demand and supply curves, which totals $11 ($8 value minus $2 cost for the first haircut, plus $7 value minus $3 cost for the second, plus $5 value minus $4 cost for the third). If Oprah, Jerry and Montel are in the market (7+5+2 = 14) our min total surplus = 14 9 = 5. b. How large is the maximum possible total surplus and what is the least possible surplus? The maximum possible surplus is $6.00 and the least possible surplus is $2.00. 5. Explain Arthur Laffers theory of tax rates relative to tax revenue. What is the effect of a tax on the deadweight loss? Why is it sometimes difficult to predict what will happen when a tax rate is

decreased or increased? The Laffers theory argued that tax revenues are related to the tax rate to a point that no revenue is generated at a tax rate of either zero or one hundred per cent. He believed that if tax rates were lowered it would motivate people to work more in turn generating more taxable revenue. He stated, Other things equal, a tax cut is more likely to raise tax revenue if the cut applies to those tax payers facing the highest tax rates. (Mankiw, 5th Ed., pg. 171). A tax on deadweight causes consumers and sellers to change their behavior about buying and how much of a good produce to sell. Because tax rate increases and decreases affect consumers and sellers differently, it is hard for economists to figure out just what will happen. Take for instance, a labor tax increase or decrease may motivate on person to work more hours, get another job whereas another person may look at it as why am I working so much just to pay more taxes. Correct What is best for the country as a whole a tariff, a quota or free trade? Explain. 6. Describe both quotas and tariffs. How do they impact domestic prices and deadweight loss? How does an import quota differ from an equivalent tariff? What is best for a nation as a whole: a tariff, a quota, or free trade? Explain your answer. Quatos are limitations on the quantity of a good that can be imported into a country during a specified period. An import quota is normally set below the free trade level of imports. A tariff is a tax set on a good that is imported and sold domestically. A tariff is normally imposed to discourage consumers from purchasing foreign goods. When a tariff tax is imposed, domestic sellers benefit and domestic, consumer are worse off because sellers increase prices to offset the tariff and consumers pay more for the product because of the tariff. By imposing a tariff tax, government in some cases raise revenue. Tariff on deadweight loss causes domestic producers to increase production of a product even though the domestic price of the product rises above the world price. because it is profitable. On the other hand, it causes consumers to decrease their purchases of the product. Import quotas are restrictions set by the government on a particular good that is imported. Import quotas raise revenue for those who hold a license to import. I believe that as a whole both tariffs/quotas restrict trade and raise prices for consumers however I believe a tariff is better than a quota because a tariff increases economic prosperity for the seller, which leads to a more productive economy. Correct on tariffs and quotas. I do not see free trade addressed which was part of the question t7. Al hough most economists agree that free trade is beneficial for a country, there are numerous arguments against free trade. Describe five of the arguments against free trade. 1. Some people argue that free trade destroys jobs of that country. When a country begins to import a product for a lower price than it is produced domestically, the price of the product, of course would fall causing the domestic companies to have to lay off workers causing a rise in the unemployment numbers. 2. Another argument is that free trade increasing offshore outsourcing. They believe that the environmental and labor restrictions imposed on these companies can and most of the time will be less in foreign production making it very difficult for domestic companies to compete. They argue that free trade would allow companies to circumvent domestic regulations, by producing elsewhere. 3. A third argument is the threat of national security. Some believe that if they allow free trade of a product that is primarily used by its military, they could become dependent on that country and if conflict was to arise, and import capabilities were interrupted, they might not be able to attain enough of the material to make whatever weapon system needed to defend itself. Others argue, which in my opinion is a greater concern, farm subsidies. People also argue the threat of bioterrorism and even unintentional diseases, entering a country because of free trade because of poor inspection policies. 4. Some people believe that protecting our infant industries may pay-off in the long run. They believe that imposing a temporary trade restriction would allow new industries to get started without having to compete in the global market with the larger more established firms. My only question is, How will

we know if the business will be successful or not? 5. Some even argue that restricting free trade gives countries leverage when and if they want to trade with another country. They claim, The threat of a trade restriction can help remove a trade restriction already imposed by a foreign government. (N. Gregory Mankiw, 5th Ed., pg. 191).correct 8. Describe the Coase theorem, which suggests that efficient solutions to externalities can be arrived at through bargaining. Explain how this happens. Under what circumstances does bargaining fail to produce a solution? The Coase theorem argues that the private sector can solve a problem dealing with externalities among themselves. He believes that no matter who holds the initial distribution of rights, both parties will, 100% of the time, reach a bargain on how to handle the externality and the situation will turn out efficient for both parties. Take for instance four families living in a four-plex apartment. Three of the families have no children but one of the families has two very active children who tend to play in the common area hallway of the apartment during unposted quit hours. Now, the other three families could try to enforce the unposted quit hours by involving an outside agency or simply bargain with the family to try to keep the children inside their apartment during quit hours. The other three families could also offer to buy a play area for the children and set it up outside where they will not be heard while playing. The cost benefit of the family to have their children indoors so one of the parents will not have to be outside watching the children while they play is $600.00 however the cost benefit to the other three families is $900.00. All parties agree to pay $750.00, which includes a portable play area and a nanny who comes by after work and watches the children play while the family gets some rest. All parties are better off than they were before and an efficient outcome is reached. Now this would not have worked if all parties were not rational people who believe in neighbors living in perfect harmony. It also would not have worked if the three families without children did not value their quit time very much. If the family with the children said that, they had, rights to use the common areas just like anyone else and their children were not bothering anyone then the families without children would probably not be able to reach an effective bargain. Correct but the key here is simply to outline the three criteria (1) The existence of significant transaction costs. (2) Parties may try to hold out for a better deal, and thus the bargaining process breaks down. (3) The number of parties to a bargaining process is large 9. Why do wild salmon populations face the threat of extinction while pet goldfish populations are in no such danger? Wild salmon in many countries have a commercial value while gold fish, not so much. Many people fish for salmon and other than a countrys regulations against the time of the year you can fish and purchasing a fishing license, what stops those people who do not fear a countrys laws from fishing as much as they want? The oceans are a large area and many different counties have access to them. Our book tells us it would take international cooperation which is also very difficult since many countries have different views on natural resources. Many countries major economic business is the sell of fish. Salmon are a common resource which are nonexcludable and rivalrous. Goldfish are a private good that are rivalrous but excludable. You need the terminology and descriptive for this answer related to common and private goods. 10. Define and explain the terms income tax and consumption tax. What would be the benefits of taxing consumption and not income? Income tax is a tax on the income of a person or business. It is the largest source of revenue for the federal government. With the income tax, each family is required to report to the federal government all wages earned from working, the savings you earned on money saved, etc. The amount of income tax a person or a firm pays in taxes is based on the total amount earned (profit). There are many variables that come into to play when calculating how

much each individual or business pays from the size of a individual family to how much money was paid out for salaries. A consumption tax is a tax that is paid on good and services that are purchased. It refers to a system with a tax base consumption. It is a tax on what people spend instead of what they earn. It can also be considered as a form of direct, personal taxation as an income tax that primarily excludes investments and savings. Consumption taxes and not regressive in some cases however they are regressive on income depending on how much a person spends. The benefit will be to the tax payer. By taxing consumption, the individual controls how much they are taxed. They would control their own consumption and the benefits would be enormous. correct 11. List the federal government's three most important sources of tax revenue. How do these differ from your state government's three most important sources of tax revenue and those of local government? Why do you think that these different government entities use different tax bases? The Federal Government three most important sources of tax revenue are income tax, social security tax, and corporate tax. Individuals and businesses are taxed by the federal government at varying rates depending on their income level, size of household, etc. Social Security taxes are used primarily to pay for the living standards of the elderly. State and local governments use a variety of taxes to raise revenues as well. State governments favor sales taxes, excise taxes and personal income taxes, whereas local governments predominately rely on property taxes. On the surface it appears that raising revenues is a fair process however state and local government officials adopt a tax or change an existing rate and the required revenues are obtained. Correct I believe that federal, state, and local governments use different tax bases to meet their responsible area requirements.

These different government entities use different tax bases because they are responsible for providing funds for different types of programs. For example, state governments are responsible for education and federal governments are responsible for military funding and disaster relief. Furthermore, the state is only responsible for maintaining itself while the federal government has to keep watch over all the states so its tax base must be larger.