Principles of Microeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (12th Edition)
12th Edition
ISBN: 9780134421315
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 3, Problem 5.4P
To determine
Illustration of market for cigarettes.
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The U.S. government administers two programs that affect the
market for cigarettes. Media campaigns and labeling requirements
are aimed at making the public aware of the health dangers of
cigarettes. At the same time, the Department of Agriculture
maintains price supports for tobacco. Under this program, the
supported price is above the market equilibrium price and the
government limits the amount of land that can be devoted to tobacco
production. Are these two programs at odds with the goal of
reducing cigarette consumption? As part of your answer, illustrate
graphically the effects of both policies on the market for cigarettes.
Some have argued that higher cigarette prices do not deter smoking. While there are many arguments both for and against this view, some find the following argument to be the most persuasive of all: “The laws of supply and demand indicate that higher prices are ineffective in reducing smoking. In particular, higher cigarette prices will reduce the demand for cigarettes. This reduction in demand will push the equilibrium price back down to its original level. Since the equilibrium price will remain unchanged, smokers will consume the same number of cigarettes.”Do you agree or disagree with this view?
Disagree - the reduction in demand will push the equilibrium price below its original level.
Disagree - this confuses a change in demand with a change in quantity demanded.
Agree - the price increase will ultimately leave cigarette consumption unchanged.
Disagree - higher cigarette prices will actually increase the demand for cigarettes.
Corn is a very valuable product for which the U.S. government routinely offers subsidies.
With no price support, the equilibrium price for corn is $300 per ton and the equilibrium
quantity is 500 million tons per year. Suppose that the government agrees to pay
farmers $350 for every ton of corn they produce and can't sell in the market. According
to the farmer's market supply curve, 600 million tons per year is supplied at the price of
$350 a ton, so production should increase to this amount. However, domestic users of
corn cut back their purchases. Only 450 million tons a year is demanded at the price of
$350 a ton, and purchases decrease to this amount. Farmers continue to produce 500
million tons of corn per year, so because they produce a greater quantity of corn than
domestic buyers are willing to purchase, something must be done with the surplus. To
make the price support work, the government decides to buy the surplus.
a. In this example, how many million tons does the…
Chapter 3 Solutions
Principles of Microeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (12th Edition)
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