Social Decision Making, 73/88--110 Fall 1996 First Exam, (c) 1996 Prof. John H. Miller Carnegie Mellon Please show all relevant work and *clearly mark all of your final answers*. Points per question are indicated by the quantities in square brackets (150 points are possible---comprising 15\% of your final grade). Answers should be short and concise (excessively long and rambling answers will be penalized). You must do your own work and no external material or assistance is allowed. There are 4 main questions and the exam is 5 pages long. Good luck. 1. Consider the market for cigarettes. Assume that in this market, there are 50 million adults who have become addicted to cigarettes. Given their addiction, they are each willing to pay up to \$10 for a single pack of cigarettes. There are also 20 million teenagers in this market. Unlike adults, teenagers have both low income and low addiction, and thus they each value obtaining a single pack of cigarettes at only \$3 a pack. Assume that there are 6 cigarette manufacturers in this market, and that each of these sellers can produce up to 10 million cigarettes at a cost of \$1 per pack. [30] In the diagram below, draw the supply and demand curves that characterize this market. *Make sure you completely label the drawing.* [2] The equilibrium price = [2] The equilibrium quantity = [2] The total sellers profit = [2] The total consumer surplus obtained by adults in this market = [2] The total number of adults who smoke = [2] The total number of kids who smoke = 2. Recent medical evidence indicates that smoking can have immediate and long-lasting harmful effects on teenagers. The government has decided to impose a \$2.10 per pack tax on cigarettes paid for by the seller. [15] Assuming the same underlying market conditions that were used in the previous problem, draw both the old (using solid lines) and any new (using dotted lines) supply and demand curves that characterize this market. *Make sure you completely label the drawing.* Given this policy, we have: [2] The equilibrium price paid by consumers in this market = [2] The equilibrium quantity sold = [2] The total sellers profit (after tax) = [2] The total consumer surplus obtained by adults in this market = [2] The total number of adults who smoke = [2] The total number of teenagers who smoke = [5] Before the new tax is imposed, cigarette manufacturers vehemently object to the new tax on the grounds that it is ``excessive, and will just result in adults who should have the right to smoke having to pay far too much for cigarettes.'' Is this objection valid? Why or why not? [5] Why do the cigarette manufacturers dislike this policy? [5] Because of the objections of the manufacturers, the government decides to impose the tax on the buyers. Will this satisfy the manufacturers? Why or why not? 3. What, if instead of the tax, the government imposes a minimum price on cigarettes equal to \$3.10. Assuming the same underlying market conditions as those in the first problem. Given this policy, we have: [3] The market price = [3] The market quantity = [3] The total sellers profit = [3] The total consumer surplus obtained by adults in this market = [3] The total number of adults who smoke = [3] The total number of teenagers who smoke = [10] Which policy is preferable, the tax policy or the minimum price policy? Why? 4. For each of the following situations, make a prediction about what will happen to the equilibrium price and quantity in the market after the policy is invoked. Assume ``normal looking'' supply and demand curves, and straight-forward effects. (It will be very helpful if you sketch a supply and demand diagram for each situation.) *No partial credit will be given in this section.* [6] In the market for apples, a report is issued that the pesticide Alar has harmful health effects on apple eaters, and growing conditions for apples are unusually favorable. Price will: increase, decrease, stay the same, can't tell? Quantity will: increase, decrease, stay the same, can't tell? [6] In the market for gall bladder surgery, new surgical techniques are developed that make the operation much quicker and less costly to the hospital, and much easier and (relatively) enjoyable for the patient. Price will: increase, decrease, stay the same, can't tell? Quantity will: increase, decrease, stay the same, can't tell? [6] In the market for home computers, users find that the internet is boring and slow, and the price of computer chips increases. Price will: increase, decrease, stay the same, can't tell? Quantity will: increase, decrease, stay the same, can't tell? [6] In the market for vacation homes in North Carolina, a hurricane makes the beaches less attractive to tourists while leaving the vacation homes unharmed. Price will: increase, decrease, stay the same, can't tell? Quantity will: increase, decrease, stay the same, can't tell? [6] In the market for body piercings, the government will pay \$5 to any teenager who remains ``piercing free'' up to the age of 21. Price will: increase, decrease, stay the same, can't tell? Quantity will: increase, decrease, stay the same, can't tell? ***end of file***