Microecon

1.     (6 points, Supply and Demand). Consider the following public policies in the market for cigarette smoking: an aggressive anti-smoking media campaign and a Department of Agriculture program limiting the land to grow tobacco. Both policies are implemented at the same time.

a.     Draw a demand and supply graph and show the effect of both policies on the cigarette market, starting from an initial equilibrium. Explain the market effect of each policy.

b.     Are the policies effective in reducing cigarette smoking? Why?

c.     What happened to the price of cigarettes after the policies went into effect? Why?

2.     (6 points, Government Policies). The government imposes a binding price floor in the wheat market. Wheat is a grain and has many other substitutes (i.e. other grains such as buckwheat, corn, rice, rye, barley, etc.)

a.     Draw a demand and supply graph to show the effect of this policy on the price of wheat and the quantity of wheat sold. Is there a shortage (excess demand) or a surplus (excess supply) of wheat? Explain why.

b.     Farmers complain that the price floor reduced their total revenue. Is this possible? Explain.

c.     In response to farmers’ complaints, the government agrees to purchase all the excess wheat produced at the price floor. Who benefits from this policy and who loses? Explain.