COURSEWORK»PROBLEMS

Problem One
In March 2002, the United States imposed a 30 percent tariff on several kinds of steel that other countries have exported to the United States. The 30 percent tariff is an extra tax that the other countries must pay if they wish to sell their steel in the U.S.

The steel affected by the tariff is used in the U.S. by U.S. firms to produce automobiles, containers, appliances, and many different kinds of electrical goods that they sell to American consumers. For example, Maytag washers and Ford autos often contain this foreign steel.

Not surprisingly, American steel making firms like the tariff because it reduces the competition they face, and the United Steel Workers (USW), the union that represents steel workers in the U.S., also thinks it is a great idea because its thinks the tariff will protect the jobs of steel workers.

Which of the following most accurately reflects the economic way of thinking about whether this tariff is a good idea? Why?

(A) In the last analysis, whether this is a good idea or not  is entirely a subjective matter of opinion; there's not much that economists or anyone else really can say with confidence about the costs and benefits of this tariff and whether it is good public policy.

(B) We should always prefer American goods to foreign goods and so it's a good idea to place a tariff on the foreign steel.

(C) There are economic costs and benefits associated with this tariff. We can compute them and determine whether or not we're better or worse off, economically speaking.

(D) Tariffs are a bad idea and yield no benefits to anyone. The steel tariff is no exception and this is bad public policy.

Make clear any assumptions upon which you base your argument.

Problem Two
Many individuals volunteer their services to churches, charitable organizations, civic clubs and public service agencies. The volunteers typically say that they are "doing it for nothing" and
that their volunteer hours "don't cost them anything."

If I contribute my time and energy to the Boy Scouts, is my service really "for nothing," and without cost, or am I actually paying a price for the service hours I provide? Explain carefully and make clear any assumptions that underpin your answer.

Problem Three
The Commonwealth of Virginia has one of the very lowest cigarette taxes in the United States, only 2.5 cents per pack. The tax hasn't been raised since the 1960s. Now, because Virginia is facing a severe state budget crunch, there is talk of increasing the cigarette tax by as much as 50 cents per pack.

(A) What is the likely effect of this tax on the quantity of cigarettes purchased in Virginia?

(B) Many studies have found the demand for cigarettes to be price inelastic, with a coefficient of about .40 . Based on this, if the price of cigarettes goes up 10 percent per pack, what specific impact will this have on the quantity of cigarettes purchased?

(C) Is it ever possible that a tax increase (such as on cigarettes) actually could reduce the tax revenue the Commonwealth collects? If so, what would have to be true about the price elasticity of demand for cigarettes in order for the state to have the problem of declining tax revenue despite a tax increase?

Problem Four
The labor market for nurses tends to be highly cyclical. When hospitals and other declare there is a shortage of nurses (as they are doing now in 2002), they must pay higher wages to the nurses they hire and they urge universities to produce more nurses. Within a few years, the apparent shortage disappears and even reverses itself. There is a glut of nurses, hospitals and other employers stop subsidizing the training of nurses with scholarships, etc., and nurses' wages begin
to stagnate.

This scenario has repeated itself many times since World War II. Use supply and demand curves to illustrate what is going on here. Start with the situation where there is a shortage of nurses at existing wage rates. Then, draw as many new sets of curves as necessary  to show what happens after this.

Problem Five
The Country of Singapore recognizes that there are external diseconomies associated with automobile driving in that small, highly congested country. As soon as many drivers appear on the roads, congestion arises and drivers slow each other down. That is, they impose costs on each other because they wish to be in the same place at the same time and there is only room for some of them. So, traffic jams result, particularly in rush hours.

Singapore's solution to this problem is to place a tax on cars that travel through certain especially congested intersections. Cars are outfitted with electronic devices that automatically deduct the tax when a car goes through the intersection. Drivers buy a certain amount of credit ahead of time and then the tax is deducted electronically every time they drive through the intersection. This process is very similar to the tolls that drivers pay electronically when drive past a sensor on a toll
road in Northern Virginia.

(A) What effect will the Singapore version of the car tax have upon driving behavior in the designated intersections there?

(B) According to economic theory, what should the size of the tax be? That is, what is the principle that should guide the Singapore government in determining how much tax a driver should pay when he/she causes congestion?

Problem Six
Use the Law of Comparative Advantage to explain why Virginia makes itself better off by specializing in activities such as naval construction in Hampton Roads and Internet-related activities in Northern Virginia and does not make any significant attempt to produce automobiles.

Problem Seven
Alan Greenspan is the Chairman of the Board of Governors of the Federal Reserve System, which controls the money supply in the United States. Many business leaders, editorial writers, and labor leaders have been encouraging him to lower the Fed's "discount rate."

If the Greenspan and the Fed do lower the discount rate, what effect do they hope this will have on the American economy? Explain.

Problem Eight
"Except for the Law of Diminishing Returns, I could grow all of the world's food supply in a flower pot." Do you agree or disagree? Why?