Question 1: Suppose that interest rates are 6 percent in the economy and a safe bond promises to pay $3 per year in interest forever. What do you think the price of the bond will be? Why?
Suppose that in this economy interest rates suddenly fall to 3 percent. What will happen to the price of the bond that pays $3 per year?
Question 2: Many economist argue that a tax on apartment buildings is likely to reduce the supply of apartments, but that a tax on all land, including the land on which apartment buildings stand, will not reduce the supply of apartments. Can you help me understand the difference?
Question 3: If you have a contract under which you will be paid $10,000 two years from now, why do you become richer if the interest rate falls?
Question 4: Suppose that a firm in a regulated industry is prohibited from earning profits higher than it is now getting and that it expands the sale of one of its products at price above its long-run marginal cost. Why the prices of other company products will, very likely have to be reduced.
Question 5: Suppose the supply and demand schedules for cigarettes are as follows:
|
Price per carton
|
Qty. Demanded
|
Qty. Supplied
|
|
$3.00
|
360
|
160
|
|
$3.25
|
330
|
180
|
|
$3.50
|
300
|
200
|
|
$3.75
|
270
|
220
|
|
$4.00
|
240
|
240
|
|
$4.25
|
210
|
260
|
|
$4.50
|
180
|
280
|
|
$4.75
|
150
|
300
|
|
$5.00
|
120
|
320
|
A. What is the equilibrium price and equilibrium quantity?
B. Now the government levies a$1.25 per carton excise tax on cigarettes. What is the new equilibrium price paid by consumers, the price received by producers, and the quantity? Why it makes no difference whether Congress levies$1.25 tax on the consumer or the producer. Suppose the tax is levied on the producers. How much of the tax are producers able to shift onto consumers and how do they manage to do this? Will there be any excess burden from this tax? Why? and who bears the burden?
If the tax schedule is as follows instead of the above:
|
Price per carton
|
Qty. Supplied
|
|
$3.00
|
60
|
|
$3.25
|
105
|
|
$3.50
|
150
|
|
$3.75
|
195
|
|
$4.00
|
240
|
|
$4.25
|
285
|
|
$4.50
|
330
|
|
$4.75
|
375
|
|
$5.00
|
420
|
C. What is the equilibrium price and equilibrium quantity in the absence of a tax?
D. What are the equilibrium price and equilibrium quantity in the presence of a $1.25 per carton excise tax?