economics 2 4

1. What is producer surplus and how is it measured? What is the relationship between the cost to sellers and the supply curve? Other things being equal, what happens to producer surplus when the price of a good rises?

2. Explain Arthur Laffer’s theory of tax rates relative to tax revenue. What is the effect of a tax on the deadweight loss? Why is it sometimes difficult to predict what will happen when a tax rate is decreased or increased?

3. Describe both quotas and tariffs. How do they impact domestic prices and deadweight loss? How does an import quota differ from an equivalent tariff? What is best for a nation as a whole: a tariff, a quota, or free trade? Explain your answer.

4. Although most economists agree that free trade is beneficial for a country, there are numerous arguments against free trade. Describe five of the arguments against free trade.

5. Describe the Coase theorem, which suggests that efficient solutions to externalities can be arrived at through bargaining. Explain how this happens. Under what circumstances does bargaining fail to produce a solution?

6. Why do wild salmon populations face the threat of extinction while pet goldfish populations are in no such danger?

7. Define and explain the terms income tax and consumption tax. What would be the benefits of taxing consumption and not income?

8. List the federal government’s three most important sources of tax revenue. How do these differ from your state government’s three most important sources of tax revenue and those of local government? Why do you think that these different government entities use different tax bases?

9. Examine the table at the following link, which shows what four consumers are willing to pay for a haircut: Attachment Below

The next link includes a table that shows what four businesses charge for a haircut: Business Charge Table. Attachment below

Each business can produce no more than one haircut.

In the most efficient world, which companies should cut hair and which customers should get a haircut? (Note: It might be less than four.)

How large is the maximum possible total surplus and what is the least possible surplus?

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