Mgec

MGEC Problem Set 1 (Associated with lectures 1 through 3): NOT TO BE TURNED IN! Question 1. All coffee sold in this country is imported from other countries. A congressman proposes an import quota on coffee as a way to reduce the balance of trade deficit. The quota specifies a maximum quantity of coffee Q* that may be imported each year. Explain the likely impacts of such a law on U.S. coffee drinkers, foreign coffee producers, and the balance of trade deficit. Question 2. The government of the country of Zuba has decided that ice cream is to be a national public good available to all citizens at the fair socialist price of 1 peso per ice cream cone. Zuban citizens do enjoy ice cream and have a downward sloping demand curve for ice cream cones measured as: Q = 10 - 2P where Q measures the quantity of cones sold per week in millions of cones, i.e., Q = 1 means than 1 million cones are sold and P measures the price per cone in pesos/cone. Competitive vendors can produce and distribute ice cream according to the following supply curve: Q = -2 + 4P where Q measures the quantity of cones sold per week in millions of cones and P measures the price per cone needed to cover the vendors’ marginal costs of the last cones sold. Three additional facts might be relevant to understanding the impact of this price regulation. First, because of their limited access to refrigeration, citizens must eat their ice cream as soon as it is purchased. Second, violation of the state’s socialist price policies by vendors leads to a fine of 3.5 pesos per cone sold, and the state is sure to catch all violators. Third, Zuban citizens are free to work as many hours as they wish at the socialist fair wage of 6 pesos/hour. A 1 peso per cone regulated price will most likely result in: A. 8 million cones sold per week at the regulated price of1 peso per cone with no customers turned away or forced to wait in line. B. 2 million cones sold per week at the regulated price of peso per cone with no