Assignment: Principles of Microeconomics

Part I.

Question 1

There is a sudden arrival of the news that there will be an excess supply of apartments to lease in Miami next year. Draw the graph of the market for apartment in Miami this year and show the equilibrium outcomes before and after the arrival of the rumor. (Label the equilibrium before the news as equilibrium 0 and the new equilibrium after the news as equilibrium 1). Explain.

Question 2

Most studies suggest that the demand for drugs is approximately around 0.5. The US government spends over $50 billion a year arresting over 1.5 million people and deterring the supply of drugs with police, prisons, and border patrols. This is in turn increases the cost of smuggling and dealing drugs. Imagine two possible regimes: a prohibition regime and a non-prohibition regime. (a) Draw a graph of the illegal-drugs market under the two regimes. (b) Show and compare the drug-seller revenues under the two regimes. Explain.

Part II.

Question 3

A free market in the absence of any government intervention always attains maximum social welfare. Do you agree or disagree? Explain.

Question 4

The following table shows the distribution of income between three individuals (Red, Blue, and Green) in five different societies:

Society     Red     Blue    Green   Average
A             100     100     100     100
B             240     50       10      100
C             600     600     99       433
D             130     120     110     120
E             1096    102     101     433

(a) Which society would be favored by John Rawls?
(b) Which society would be favored by the Utilitarians?
(c) What would Robert Nozick say about moving from society E to society C?
(d) What would Vilfredo Pareto say about moving from society B to society D? Justify your answers.