Question

16. The cross elasticity of demand for Cheez-its and Cheddar Jack Cheez-its is likely to be

1. positive because they are substitutes.
2. positive because they are complements.
3. negative because they are substitutes.
4. negative because they are complements.
5. negative because they are inferior goods.

17. In the summer of 20017, the price of gasoline increased greatly. If the demand curve for gasoline did not shift, which of the following occurred?

1. Drivers received no consumer surplus after the price increase.
2. Consumer surplus increased if drivers drove less.
3. Consumer surplus decreased.
4. If consumers drove the same amount, they received less total benefit.
5. Both the marginal benefit from each gallon of gasoline and the consumer surplus from each gallon of gasoline decreased.

3. If landlords are not allowed to charge the equilibrium amount for rent, what is one (non-monetary) way that their behavior towards their tenants might change? (2 points)
4. One party (buyers or sellers) pays less of the tax than the other.
   1. How much of the tax do consumer pay? (2 points)
5. 2. Why does this happen? Explain why one party is better able to avoid the tax than the other. (3 points)
6. Imagine you have a nice garden in your back yard and one day you get new neighbors who have a pet llama. This llama sometimes gets loose from his enclosure in the neighbor’s back yard and comes over to your property and eats up some of your garden.
7. Since the llama is on your property, if you call the police, they will make your neighbor get rid of the llama. Is this what Ronald Coase would suggest you do? Explain (4 points)
8. Given that you clearly own the property that the garden is on, is there any way (according to Coase) in which the llama will be allowed to continue to feast in your garden? If yes, explain how that might happen. If no, explain why not. (4 points)

Answer 1

1> c

They are obviously substitutes as they both are types of cheese. Now, a increase in sales of one type of cheese will mean a decrease in sale of another type. Thus, the coefficient should be negative.

2> c

If the demand curve has not changed and the supply curve has shifted leftwards, that definitely leads to a fall in consumer surplus.

3> If there is a rent-ceiling and the landlord can not charge the equilibrium rent, the owner can behave rudely towards the tenant as he knows that there are enough people in the market who would like to be his tenant. Also, there might be screening of the people whom they would like to rent it out.

4> Fot the Llama question, no, Coase would not have suggested it. There should be a complete market solution to these problems of externality if there is small or no transaction cost. Here, he can approach the neighbour and ask him to pay for the loss and then they can settle down without involving third party.