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Demand and Supply, Market Failures, and Corruption: Questions and Answers

Effects of Factors on Demand for Small Automobiles

1.What effect will each of the following have on the demand for small automobiles such as the Honda Civic or Ford Focus? LO3.2  

a.Small automobiles become more fashionable.

b.The price of large automobiles rises (with the price of small autos remaining the same).

c.Income declines and small autos are an inferior good.

d.Consumers anticipate that the price of small autos will greatly come down in the near future.

e.The price of gasoline substantially drops.

2.What effect will each of the following have on the supply of auto tires? LO3.3  

a.A technological advance in the methods of producing tires.

b.A decline in the number of firms in the tire industry.

c.An increase in the prices of rubber used in the production of tires.

d.The expectation that the equilibrium price of auto tires will be lower in the future than currently.

e.A decline in the price of the large tires used for semi trucks and earth-hauling rigs (with no change in the price of auto tires).

f.The levying of a per-unit tax on each auto tire sold.

g.The granting of a 50-cent-per-unit subsidy for each auto tire produced.

Chapter 4

1.Explain the two causes of market failures. Given their definitions, could a market be affected by both types of market failures simultaneously?

2.Use the ideas of consumer surplus and producer surplus to explain why economists say competitive markets are efficient. Why are below- or above-equilibrium levels of output inefficient, according to these two sets of ideas?
3.What are the two characteristics of public goods? Explain the significance of each for public provision as opposed to private provision. What is the free-rider problem as it relates to public goods? Is U.S. border patrol a public good or a private good? Why? How about satellite TV? Explain.

Chapter 5

1.Consider a corrupt provincial government in which each housing inspector examines two newly built structures each week. All the builders in the province are unethical and want to increase their profits by using substandard construction materials, but they can’t do that unless they can bribe a housing inspector into approving a substandard building. LO5.2  

a.If bribes cost $1,000 each, how much will a housing inspector make each year in bribes? (Assume that each inspector works 52 weeks a year and gets bribed for every house he inspects.)

b.There is a provincial construction supervisor who gets to hire all of the housing inspectors. He himself is corrupt and expects his housing inspectors to share their bribes with him. Suppose that 20 inspectors work for him and that each passes along half the bribes collected from builders. How much will the construction supervisor collect each year?

c.Corrupt officials may have an incentive to reduce the provision of government services to help line their own pockets. Suppose that the provincial construction supervisor decides to cut the total number of housing inspectors from 20 to 10 in order to decrease the supply of new housing permits. This decrease in the supply of permits raises the equilibrium bribe from $1,000 to $2,500. How much per year will the construction supervisor now receive if he is still getting half of all the bribes collected by the 10 inspectors? How much more is the construction supervisor getting now than when he had 20 inspectors working in part b? Will he personally be happy with the reduction in government services?

d.What if reducing the number of inspectors from 20 to 10 only increased the equilibrium bribe from $1,000 to $1,500? In this case, how much per year would the construction supervisor collect from his 10 inspectors? How much less is the construction supervisor getting than when he had 20 inspectors working in part b? In this case, will the construction supervisor be happy with the reduction in government services? Will he want to go back to using 20 inspectors?

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