1. Suppose the black-and-white TV industry and the color industry are both constant cost industries. Show graphically what happens to these industries as consumer tastes shift away from black-and-white TVs to color TVs. Explain your results.
2. Assume that medical care is an increasing cost industry. Starting from LR equilibrium, suppose Congress passes a bill which grants a specific subsidy to all consumers of medical care. Given that such an action will increase demand, trace out the consequences of this subsidy to consumers using graphs and explain your results.
3. Use the numbers in Table 1 to do the following problem on farm policy.
Table 1
P QD0(SR) QD1(LR) QS0(SR) QS1(SR) QS2(LR)
$20 800 0 1600 1200 2400
$18 900 300 1500 1200 2100
$16 1000 600 1400 1200 1800
$14 1100 900 1300 1200 1500
$12 1200 1200 1200 1200 1200
$10 1300 1500 1100 1100 900
$8 1400 1800 1000 1000 600
$6 1500 2100 900 900 300
a. Using QD0(SR) and QS0(SR), draw a graph with a price support of $16. Indicate the ES and calculate the amount that consumers spend on the good, and the amount that the USDA spends on surpluses.b. Assume production controls are imposed by the USDA in order to control the size of the surplus. Using QD0(SR) and one of the SR supply curves, draw a graph of this situation and indicate whether or not the USDA has managed to eliminate the surplus. Explain your result.
c. Assume the government sets a target price of $16. Using QD0(SR) and QS0(SR), draw a graph of this situation. Calculate the amount that consumers spend on the good and the USDA spends on direct payments to farmers and indicate these areas on the graph. Then calculate the welfare loss associated with this method of government subsidization and indicate the area on the graph.
d. Repeat parts a and c using QD1(LR) and QS2(LR). What do you observe about the size of the surpluses, the size of the direct payments, and the size of the welfare losses? Explain your findings.
e. Assume USDA raised the price floor (target price) to $18. If agriculture is an increasing cost industry, draw the market and firm graphs to indicate the reaction to this change in the price floor. Explain your results.4. Assume that drugs are legalized but that they are taxed (much like alcohol is now). Start with a constant cost industry in LR equilibrium and then have the government levy a specific tax on the industry. Show graphically how this tax affects the market and how the market adjusts to the tax. Explain your graph. Also verbally explain what happens to the firm when the tax is imposed on it and how it adjusts. What would the case of a specific subsidy to producers look like?