1) What is meant by deadweight loss? Why does a price ceiling usually result in a deadweight loss?

2) Suppose the government regulates the price of a good to be no lower than some minimum level. Can such a minimum price make producers as a whole worse off? Explain.

3) Suppose the government wants to limit imports of a certain good. Is it preferable to use an import quota or a tariff? Why?

4) Suppose the market for widgets can be described by the following equations:

Demand: P = 10 Q Supply: P = Q 4

where P is the price in dollars per unit and Q is the quantity in thousands of units. Then:

a. What is the equilibrium price and quantity?

b. Suppose the government imposes a tax of $1 per unit to reduce widget consumption and raise government revenues. What will the new equilibrium quantity be? What price will the buyer pay? What amount per unit will the seller receive?

c. Suppose the government has a change of heart about the importance of widgets to the happiness of the American public. The tax is removed and a subsidy of $1 per unit granted to widget producers. What will the equilibrium quantity be? What price will the buyer pay? What amount per unit (including the subsidy) will the seller receive? What will be the total cost to the government?