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Microeconomics
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Course / Week 10: Equity / Problem Set 10

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Problem Set due Mar 27, 2024 07:30 +08 Completed

Problem PS10.1.1
1.0/2.0 points (graded)
Suppose an entire economy consists of two markets: tobacco and other goods. In this economy, secondhand smoke is
known to be harmful and reduce the ability of all consumers to earn income. Still, for the few individuals who consume it,
tobacco yields very high utility levels.

What's the name of the phenomenom by which consumer income in the other goods market decreases as a function of
, the exchanged quantity in the tobacco market?

Secondary effects

Marginal income taxes

Externalities

Indirect subsidy

Adverse effects

The global tobacco industry has become increasingly concentrated in recent decades; currently the top 3 firms control
91% of the market. What will happen to this economy if the cigarette industry becomes a monopoly ?

will increase

will decrease

The effect on is ambiguous

Social welfare will increase

Social welfare will decrease

The effect on social welfare is ambiguous

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Problem PS10.1.2
1/1 point (graded)
In order to improve social welfare, the government could set , the income tax rate…

…at the peak of the Laffer curve.

…to the right of the peak of the Laffer curve.

…to the left of the peak of the Laffer curve.

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 Problem PS10.1.3
1/1 point (graded)
Bugsy is the only loanshark in Miami. He is reviled throughout the community for his practice of charging higher interest
rates to more desperate borrowers. Local consumer credit advocates lobby Miami’s mayor to impose regulations on
Bugsy.

If the mayor’s objective is to increase social welfare by minimizing deadweight loss, what regulation should he enact?

Nothing; social welfare is already being optimized

The mayor should cap the maximum interest rate Bugsy can charge

The mayor should cap the number of loans Bugsy can make

The mayor should tax Bugsy's transactions

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