# Economics-Q62

## Economics-Q62 Online Services

PART ONE

For each of the following three statements, please indicate whether the statement is true, false, or uncertain, and explain why. If the statement has two parts, or if it is partly true and partly false, explain both parts. The evaluation of your answer focuses on the quality of your explanation.

A.
(12 points) Given the following information: The market for landscaping services offered to households is perfectly competitive. Landscaping by household homeowners creates positive externalities.
Statement to evaluate: To increase economic well-being, the government should give subsidies to firms that provide landscaping services to households.

B.
(10 points) Given the following information: You have just completed difficult research that located and pulled together obscure propriety data, and you discover the following

For the past year, the average repair frequency for motorcycles (originally purchased in year 2015) that are owned by their original buyers are about the same as the average repair frequency for motorcycles (originally purchased in year 2015) that are owned by people who are the second owners of the motorcycles.
Statement to evaluate: This fact is evidence suggesting a market for lemons.

C.
(14 points) Given the following information: A profit-maximizing monopoly sets one price to all buyers of its product, and the market demand curve is a downward-sloping straight line. The monopoly has a constant average cost of production equal to \$10 per unit. The government imposes an excise tax of \$6 per unit on this product, collected from the monopoly. With the excise tax in place, the monopoly earns a positive economic profit. For this product, there are no externalities, no government price regulation, and no international trade.

Statement to evaluate: The incidence of the excise tax per unit is more than half (and possibly all) on consumers of the product.

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PART TWO

Chile is an importer of seaweed, and the Chilean government has in place a tariff on imports of seaweed of \$8 per ton. With the tariff of \$8 per ton, the domestic price in Chile is \$28 per ton. Assume (for your answers to questions A and B) that the foreign supply of imports into Chile is infinitely elastic at the going world price.
The attached graph shows Chilean domestic demand for seaweed (Dd), Chilean domestic supply of seaweed (Sd), and the domestic price (with the tariff in place) of \$28 per ton. In your answers to the questions in this part, use the attached graph, adding any curves and labels that you need to add for your answers.

There is now an increase in domestic demand for seaweed (a shift of the Dd curve), as more Chileans become convinced of the health benefits of eating seaweed. The Chilean government keeps its tariff rate at \$8 per ton.

A.
(10 points) Show graphically and explain the effects of the increase in domestic demand on the domestic quantity produced and the domestic quantity consumed.

B.
(20 points) Show graphically and explain the effects of the increase in domestic demand on domestic producer surplus, domestic consumer surplus, and government tariff revenue. Use the graph to indicate whether the inefficiency caused by the tariff increases, decreases, or stays the same (as a result of the increase in domestic demand).

C.
(4 points) How would your answer to Question A differ, if Chile is a large country rather than a small country? Explain. (Note: You only need to address the changes in the quantity produced domestically and the quantity consumed domestically. A verbal answer can be sufficient, so any use of a graph in your answer to this question is optional).
Graph for Part Two

Product Code-Economics-Q62