NAME:________________________
Ec.2100-Tansey July 17, 2016
EXAM 3
PART 1. (40 points)
Following is a production table showing how many
pairs of jeans can be produced with sewing machines (vertical axis) and labor (horizontal)
axis:
Labor
Sewing Machines
0
4
8
12
16
0
0
4
7
12
13
3
2
8
9
13
14
6
4
9
10
14
15
9
6
10
11
15
16
12
8
11
12
16
18
15
10
12
13
17
20
18
12
13
15
18
21
21
14
15
17
19
22
24
16
17
18
20
23
A.
What is the marginal physical product of 12 units of labor when there are 12
sewing
machines?
(Show
how
you
get
your
answer):__________________________
B.
What is the marginal physical product of 12 sewing machines when there are 12
units of labor? (Show how you get your answer):__________________________
C. Which of the following best characterizes the jean production? (circle one)
a) perfect substitutability between sewing machines and labor.
b) imperfect substitutability between sewing machines and labor.
c) no substitutability between sewing machines and labor.
1 point for each question on this page.
D. Suppose a unit of labor cost $5 and each sewing machine costs $4 to use. In the
following table, show the cost of using different combinations of sewing machines and
labor:
1
Labor
Sewing
Machines
0
price of
sewing
machine
=
$4.00
(wage=
4
$5.00 )
8
12
16
0
3
6
9
12
15
18
21
24
E. The above table shows the firm’s variable costs. Using the least cost technique shown
in class, fill in the following table on the basis of your calculations in the previous two
tables. Fill in the blanks of the following table based on the total cost, variable cost (least
cost!), and revenue information in the following table (if you can’t make the final numeric
calculation just show what computations with what numbers would have to be made):
Quan
Tity
(Q)
Total
Revenue
($)
Total
Costs
($)
0
4
8
12
16
20
Variable
Costs
($)
Price
($/Q)
Marginal
Revenue
($/Q)
Average
Total
Cost
($/Q)
Average
Variable
Cost
($/Q)
Marginal
Cost
($/Q)
Profit
($)
AveRage
proFit
($/Q)
Elasticity
48
0
4
8
12
16
20
q
Fixed
Costs
($)
11
10
9
8
7
TC
48
68
80
108
144
188
FC
48
48
48
48
48
48
VC
0
20
32
60
96
140
ATC
AVC
MC
Price
17
10
9
9
9.4
5
4
5
6
7
5
3
7
9
11
11
10
9
8
7
TR
0
44
80
108
128
140
MR
11
9
7
5
3
Profit
-48
-24
0
0
-16
-48
Av
Profit
Elasticity
-6
0
0
-1
-2.4
1
-7
-3.8
-2.43
-1.67
1 point for each column beginning with fixed costs
F. Graph the Average total cost, average variable cost, marginal cost, marginal revenue and
demand curve in the following graph. Make sure you label each axes and fit the graphs to
the maximum possible space (not all scrunched up!):
2
G. Graph top of next page (make sure to label the graph to include negative values if
there are any)
!
?
[ ]
2 points for each question on this page (including symbols in the graph)
D. With an arrow ( )point to the output on the X-axis where profit will be maximized
E. Circle the output at which revenue will be maximized.
F. Put an exclamation point (!) where the greatest efficiency of production can be
achieved.
G. [Bracket] the shutdown point (corresponding to the shutdown price on the Y-axis
and output at the shutdown price)
H. Place a question mark () where output would have to be to minimize total cost.
I. Place a rectangle around the OUTPUT at which average profit would be maximized.
I. At what output level would a firm with the above cost and revenue curves end up
producing, based on their long run incentives?
12 to 16 units in a competitive market.
20 units for an oligopoly.
8-12 units for a monopoly.
3
J. Which of the following types of markets is the above diagram most likely to
represent if it is in long run equilibrium?
(b)
A monopolistically competitive market downward sloping demand and zero
profit)
K. Which of the following is NOT true of producing at an output of 20 units in the
above table? (3 pts. For this question)
A) Demand is elastic.
B) Marginal revenue is negative.
C) profits are negative
D) Average revenue is positive.
PART II. (60 points)
Figure 1. Shifts of Supply and Demand
(A)
(B)
SUPPLY SHIFTS:
LEFTWARD (up)
(up)
P
Supply
Q
(C)
(D)
RIGHTWARD (down)
DEMAND SHIFTS:
LEFTWARD (down)
RIGHTWARD
P
P
P
Supply
Q
Demand
Demand
Q
Q
I. (35 pts) Following are several articles. For each article
answer the questions that follow given the underlined
market in the article and the event in bold italic letters:
1 pt. for each question!
ARTICLE 1. Steve Jobs, Price Fixer?
Wall Street Journal, March 12, 2012
… No one knows the next chapter in the future of books, but lawyers in the Antitrust
Division of the Justice Department claim to know precisely how this industry in
4
transition must be structured and operated, down to the correct price for an e-book.
The government's certainty is the basis of a threatened price-fixing lawsuit against
Apple and top book publishers.
At issue is an agreement publishers made with Steve Jobs in 2010, as he was about to
launch the iPad. At that time, Amazon's Kindle had 90% of the market for e-books.
Book publishers had imported the "wholesale model" from the print world, where
they sold retailers books for roughly half the recommended cover price. This made
sense in the bricks-and-mortar world of returns of unsold books and
expensive inventory. It was in the interests of publishers and booksellers to sell at
whatever the market would bear.
But in the e-reader world, Amazon could sell e-books at very low prices, usually for
$9.99, losing money on many of them. Amazon's strategy was to price books
as loss leaders to support sales of the Kindle, hoping to keep the device's
near-total market share….
Steve Jobs was at the center of one of the better known disconnects between Silicon
Valley and Washington. President Obama had asked him for a one-on-one meeting in
2010. Jobs told the president he was "headed for a one-term presidency" because
Washington was smothering the innovation that had been the country's growth engine.
The introduction of Kindle to the traditional “bricks-andmortar” book market most likely led to which of the
following supply or demand shifts?
1. Figure 1 (circle one) A
B C
D (1/2 credit for B)
2. Determinant that is changing (write only one) substitutes (if B circled, then # of
sellers)
3. What will occur as a result of this shift alone (circle only one)?
(a) Price and quantity both rise.
(b) Price and quantity both fall.
(c ) Price rises and quantity falls.
(d) Price falls and quantity rises. (must circle this if “B” above)
Name the precise type of each of the following that appears in the above article.
4. Market failure:market power
5. Government Intervention:antitrust
6. Government Failure: “smothering innovation” is dynamic government
failure
7. Which of the following studies should be undertaken to decide if the market
failure should be corrected by the government intervention? (circle JUST ONE)
5
CostBenefitAnalysis CostEffectivenessAnalysis FiscalImpactAnalysis
IndustryStudy (ALWAYS WHEN ANTITRUST INVOLVED!!!)
EconomicImpactAnalysis
RegulatoryImpact
ClosureAnalysis
ARTICLE 2.
New Israeli Law Bans Underweight Models in
Ads Wall Street Journal, March 20, 2012
JERUSALEM— A new Israeli law bans showing overly thin models from local
advertising in an attempt to fight the spread of eating disorders.
It also requires publications to disclose when they use altered images of models to
make the women and men appear even thinner than they really are.
The law, passed late Monday, appears to be the first attempt by a government to use
legislation to take on a fashion industry accused of abetting eating disorders by
idealizing extreme thinness. It could become an example for other countries grappling
with the spread of anorexia and bulimia, particularly among young women….
The new law requires models to produce a medical report dating back no more than
three months at every shoot that will be used on the Israeli market, stating that they
aren't malnourished by World Health Organization standards.
The U.N. agency uses a standard known as the body mass index — calculated by
factors of weight and height — to determine malnutrition. WHO says a body mass
index below 18.5 is indicative of malnutrition, said Dr. Adato, a gynecologist.
According to that standard, a woman 5 feet, 8 inches tall should weigh no less than
119 pounds….
Critics said the legislation should have focused on health, not weight, saying many
models were naturally very thin.
…
Top Israeli model Adi Neumman said she wouldn't pass under the new rules, because
her BMI was 18.3. Ms. Neumman said she ate well and exercised. She said legislation
should have focused on health and well-being, not weight.
….
Legislator Adato said only 5 percent of women had BMI that naturally fell under 18.5.
"On the one hand, maybe we'll hurt a few models," Dr. Adato said. "On the other
6
hand, we'll save a lot of children."
What will be the effect of the law on the advertising market?
1. Figure 1 (circle one) A
B C
D (could also be “C” )
2. Determinant that is changing (write only one) FEWER MODELS means
higher price of resources or fewer number of sellers (less capacity to advertise).
If you chose “C” you would have to make the argument that peoples’ tastes for
thin models means there would be less demand for advertising that could not
use such models.
3. What will occur as a result of this shift alone (circle only one)?
(b) Price and quantity both fall. (this if you circled “C”)
(c ) Price rises and quantity falls.
Name the precise type of each of the following that appears in the above article.
4.
The government is intervening in the market because of which market failure?
Market failure: inequity (abuse of models), public bad or negative consumption
externality (third parties imitate models to be thin which is unhealthy and raises
health care costs), information asymmetry (misleading advertising that leads people
who think being thin is possible to imitate what is not possible)
5. What type of Government Intervention is it using: standards regulation or
maximum output restriction.
6. When the firms it lends to go bankrupt which Government Failure is
involved whoops- my fault. Automatic point.
7. Which of the following studies should be undertaken to prevent business
failures as a result of the government intervention? (circle JUST ONE)
CostBenefitAnalysis CostEffectivenessAnalysis FiscalImpactAnalysis
IndustryStudy
EconomicImpactAnalysis
RegulatoryImpact
ClosureAnalysis
ARTICLE 3.
As Obama Visits N.M., Utility and Advocacy Groups Protest EPA Rule
By Patrick O'Connor
New Mexico’s biggest utility welcomed President Barack Obama to the Land of
Enchantment Wednesday evening with full-page newspaper ads protesting an
Environmental Protection Agency order to curb the pollution that causes
haze. But there’s a catch.
7
The utility, PNM, is joined by the Navajo Nation, the International Brotherhood of
Electrical Workers and Prosperity Works, an advocacy group for low-income New
Mexico residents.
The ad, which ran in the state’s four largest newspapers, protests an EPA order that
would require the utility to retrofit an old coal-fired power plant to reduce haze. [The
company has taken the agency to court, arguing a state requirement accomplishes the
same goal at a fraction of the cost].
The advocacy groups joined the fight because, they argue, the EPA order would result in
increased electricity costs for New Mexico residents because the utility would pass
the costs of an upgrade on to consumers…
Requiring coal-fired power plants to reduce haze leads to what shift in the New
Mexico Electricity market.
1. Figure 1 (circle one) A
B C
D
2. Determinant that is changing (write only one) price of resources (more costs of
compliance), seller expectations (no plants can be in the market without clean
emissions), # of sellers (less capacity to produce)
3. What will occur as a result of this shift alone (circle only one)?
(a) Price and quantity both rise.
(b) Price and quantity both fall.
(c ) Price rises and quantity falls.
(d) Price falls and quantity rises.
Name the precise type of each of the following that appears in the above article.
4. Market failure:negative production externality or public bad (haze)
5. Government Interventionregulation-standards
6. Government Failure:Compliance cost,
7. Which of the following studies should be undertaken to decide if the market
failure should be corrected by the government intervention? (circle JUST ONE)
CostBenefitAnalysis CostEffectivenessAnalysis (cheaper state way to
accomplish same task)
EconomicImpactAnalysis (the kind of study done to minimize compliance cost)
RegulatoryImpact (the kind of study done to find best way to regulate)
ARTICLE 4.
Retraining for Air Controllers
8
Federal officials said Wednesday they would require all air-traffic controllers to
undergo periodic retraining, as part of a broader shift to identify budding safety
threats instead of launching investigations after close calls such as near-collisions.
The Federal Aviation Administration's initiative to reduce controller mistakes
increasingly will rely on voluntary error reports filed by employees and use computer
systems able to flag instances when planes come too close to each other.
The new push, described by agency officials as a "cultural change in air-traffic safety,"
seeks to analyze large volumes of data to spot hazardous trends, from potentially
dangerous landing approaches to confusion over radio transmissions. FAA officials then
hope to use the data to enhance safety through various procedural changes, safeguards
and other measures.
The initiative is intended to catch and mitigate systemic risks earlier than currently
done—as airlines, plane manufacturers and other parts of the FAA have been doing for
many years—instead of sticking with the air-traffic-control system's traditional approach
of launching investigations after reports of near-collisions in the air or on the ground.
In many cases, such techniques "identify discrepancies that would never have been
identifiable" before, said David Grizzle, the FAA's traffic-control chief, because there
weren't computerized detection systems and controllers were worried about being
punished for reporting mistakes. In recent years, the FAA has instituted nonpunitive,
voluntary reporting programs.
The emphasis on prediction, Mr. Grizzle said, means the FAA is intent on confronting
safety problems before accidents happen, and in making sure preventive steps are
"translated into changed behavior that reduces risk."
…
FAA officials said they expect a major jump in controller-error incidents this year as
more-effective reporting systems kick in.
But some air-safety experts, including pilots and industry consultants, contend the FAA's
statistics continue to dramatically understate the frequency of controller mistakes. They
point to hundreds of additional airborne close calls each year, when planes were in
danger of flying too near each other, and the problem was averted only because on-board
warning systems issued alerts to pilots to change course.
These flights, however, never lost the minimum required distance between aircraft, so
they aren't included in the FAA's numbers.
According to the National Transportation Safety Board, which independently collects
such data, in fiscal 2011 there were more than 900 incidents when controller or pilot
errors resulted in automated cockpit warnings to crews to take evasive action to increase
separation between aircraft.
Citation:
http://online.wsj.com/article/SB10001424052702303863404577281911276845458.html
March, 2012
The effect of requiring more training for traffic controllers should have
what impact on supply or demand in the airline service market?
1. Figure 1 (circle one) A
B
C
D
9
2. Determinant that is changing (write only one) price of resources (airlines must
pay for traffic controller services)
3. What will occur as a result of this shift alone (circle only one)?
(c ) Price rises and quantity falls.
Name the precise type of each of the following that appears in the above article.
4. Market failure:public bad- risk of air crashes that could effect anyone
5. Government Interventionstandards regulation
6. Government Failure:information asymmetry (old reporting procedure
provides disincentives to record near misses), public bad (government has taken
too long to respond to the public bad created in the market), administrative cost,
compliance cost
7. Which of the following studies should be undertaken to decide if the market
failure should be corrected by the government intervention? (circle JUST ONE)
CostBenefitAnalysis CostEffectivenessAnalysis IndustryStudy
EconomicImpactAnalysis
RegulatoryImpact (any of these can be justified to
measure how best to regulate)
ARTICLE 5.
Ohio Alleges Collusion on Road Salt
Cargill Inc. and Morton Salt Inc. colluded to split the market for the rock salt used on
Ohio's roads, the state's attorney general said Wednesday after filing a… lawsuit
seeking as much as $50 million from the companies.
… The inspector general's report had estimated the state overpaid $47 million to $59
million for salt in the past decade.
…
The lawsuit alleges the two companies' bidding practices couldn't have occurred without
communication between them. It details communications, including 58 separate phone
calls, emails and letters, it says are between a Morton vice president and Cargill
employees about rock salt. That same executive, the lawsuit alleges, received a voice
mail in 2007 from a Cargill executive who discussed plans to suspend salt shipments for
a month.
Cargill, which is involved in grain merchandising and other agricultural businesses, is
among the world's largest private companies. It dominates the market for rock salt in
northern Ohio, controlling 68% to 88% of it from 1999 to 2010, according to the lawsuit.
The lawsuit alleges that Cargill colluded with Morton because of a law requiring the
state's Transportation Department to purchase Ohio-mined salt any time there were at
least two in-state bidders, regardless of whether there was a cheaper supply from out-ofstate.
Citation:
http://online.wsj.com/article/SB10001424052702304724404577295682507253286.html?KEYWORDS
=antitrust
10
If the salt companies lose the law suit, what will be the impact on the supply or
demand for salt in Ohio?: Answer the following questions:
1. Figure 1 (circle one) A
B C
D
2. Determinant that is changing (write only one) taxes, price of resources (both
increase if they pay $50 million)
3.What will occur as a result of this shift alone (circle only one)?
(c ) Price rises and quantity falls.
Name the precise type of each of the following that appears in the above article.
4. Market failure: market power (oligopoly- few sellers who are
interdependent)
5. Government Intervention: antitrust
6. Government Failure:administrative, compliance, market power (government
slow to eliminate collusion and may actually have caused it by the way they
contract for road salt)
7. Which of the following studies should be undertaken to decide if the market
failure should be corrected by the government intervention? (circle JUST ONE)
CostEffectivenessAnalysis (find least cost way to provide road salt)
IndustryStudy (examine market structure to see how to prevent conspiracy)
PART II. (25 pts) Read the following excerpts
and use the following diagrams to answer the
questions in this section on the basis of the
underlined government intervention in the
excerpts.
Figure 2. Types of Regulation
11
ARTICLE 1.
States Get Medicaid Rules
By: Louise Radnofsky
http://online.wsj.com/article/SB10001424052702303863404577285843481689090.html
The Obama administration on Friday told states how to enroll millions more low-income
Americans into Medicaid under the health-care overhaul, …
The department run by Secretary Kathleen Sebelius, above, published rules on Friday for
expanding Medicaid.
The regulations, published by the Department of Health and Human Services, detail the
scheduled expansion of Medicaid to cover a larger batch of low earners in 2014, when
much of the health-care law is set to take effect.
"Medicaid will look and feel like a very different program by 2015," said Cindy Mann, a
top official at the agency charged with overseeing the changes.
The Medicaid expansion is part of the broader case brought by opponents of Democrats'
2010 health-care law that the Supreme Court will begin hearing March 26. To reduce the
number of uninsured Americans, the law calls for adding 17 million or more additional
people to the Medicaid program in the next decade.
While the case before the court centers on the law's requirement that most Americans
carry insurance or pay a fee, plaintiffs also are arguing that the Medicaid expansion also
violates the Constitution. The plaintiffs, who include attorneys general and governors
from 26 states, contend the federal government is forcing them to take on expensive new
responsibilities that they can't afford.
…..
12
Medicaid allows states to set up their own systems to provide health care for the poor,
under rules set by the federal government and supplemented by state laws. The federal
government usually matches every dollar a state spends on the program with another
dollar, and sometimes more. Most states currently only cover poor families with children.
Supporters of the health-care law point out that [the federal government will pick up
100% of the costs of the Medicaid expansion for the first few years after 2014, and 90%
after that. They also say states are free to leave the program if they choose, and that states
can't take federal money for Medicaid and ignore rules for how it can be spent.
Opponents of the law say that, with increasing pressure on state budgets, of which
Medicaid is usually the largest share, even that 10% contribution could be too much to
bear. They say states can't truly exit from the program entirely because they have come to
depend on it.
"I think states' resistance to this is understandable," said Alan Weil, a former state
Medicaid director who heads the nonpartisan National Academy for State Health Policy.
"Politically, clearly the tough budgets make even coming up with the 10% hard. But
whether that's compelling states is a different issue."
…
Suppose the Supreme Court backs the Obama Administration’s
requirements to include 17 million more people under Medicaid.
1. Which diagram in Figure 2 best characterizes the regulation described here?
(circle just one)
A
B
C
D
2. Relative to the equilibrium without regulation where Is the shadow price due to
the regulation? (circle just one)
a)
Above equilibrium
b)
Below Equilbrium
3. Describe the government failures and type of disequilbrium that will occur due to
this kind of regulation. Be thorough
Requires govt. subsidy to work because people willing to pay less than what is
required to provide health
ARTICLE 2
Judge blocks Arizona immigration law's day labor rules
(Reuters) - A federal judge blocked Arizona on Wednesday from enforcing a part of the
state's immigration law that prohibits vehicle occupants from stopping traffic to
pick up day laborers waiting for work
U.S. District Judge Susan Bolton, in issuing a preliminary injunction, ruled that plaintiffs
seeking to overturn the law were "likely to succeed on the merits of their claim" that the
rules violate the First Amendment Arizona's Republican Governor Jan Brewer passed the
state's tough immigration law in April 2010, seeking to clamp down on illegal
immigrants in the Mexico border state.
13
The section of the controversial law Bolton blocked on Wednesday sought to target
people who employ migrant workers in the country illegally, many of whom gather in
store parking lots and on curbsides in Phoenix to tout for work.
The non-profit National Day Laborer Organizing Network, which was a plaintiff in the
suit, hailed the ruling.
"Today's decision is a victory for day laborers and everyone who cherishes the First
Amendment right to free expression on public streets and sidewalks," network attorney
Jessica Karp said in a statement.
"In seeking to silence day laborers, the state of Arizona trampled on the U.S.
Constitution. Day laborers fought back and bravely defended the First Amendment for
the benefit of all," she said.
Arizona's tough immigration crackdown had wide support in the state but was opposed
by President Barack Obama, many Democrats and civil rights groups.
Opponents of the law said it would lead to harassment of Hispanic-Americans. Obama
has called such "piecemeal" state legislation a mistake and warned that having 50
different immigration laws around the country is untenable.
…
Brewer said in a statement she was disappointed by Wednesday's ruling, which she
described as an "erroneous decision by the U.S. District Court to strike down a significant
public safety component" of the law, dubbed SB 1070.
"The provision, which would have prohibited day laborers from blocking traffic when
seeking work on public roadways, was put in place as a necessary traffic safety measure,"
Brewer said.
….
Suppose Arizona’s anti-immigration goes into effect and is considered
legal by the Supreme Court. What effect does this have on the labor
market with respect to illegal immigrants?
1. Which diagram in Figure 2 best characterizes the regulation described here?
(circle just one)
A
B
C
D
2. Relative to the equilibrium without regulation where Is the shadow price due to
the regulation? (circle just one)
a)
Above equilibrium
b)
Below Equilbrium
3. Describe the government failures and type of disequilbrium that will occur due to
this kind of regulation. Be thorough High shadow price provides people incentive
to provide illegal immigrants to US market.Illegal (black) market requires
expensive government enforcement.
14
ARTICLE 3.
.
India Bans Cotton Exports
By LESLIE JOSEPHS in New York and DEBIPRASAD NAYAK in Mumbai
India is once again pulling the strings in the cotton market.
The world's second-largest producer of the fiber after China unexpectedly
announced an immediate ban on cotton exports, sending benchmark
futures prices soaring.
Front-month prices on ICE Futures U.S. rose 6%, or 5.25 cents, to settle at
92.71 cents a pound, while the more actively traded May-delivery contract
surged by the exchange-permitted daily limit of four cents to settle at 92.23
cents a pound. The front-month contract, for March delivery, was exempt from
the limit because it is in the period in which traders state whether they will
deliver or accept physical cotton against the contract.
"It is dramatic. It is a game-changer" for cotton merchants, because Indian
cotton is less expensive than fiber grown in other countries, said Sharon
Johnson, a senior analyst at Penson Futures.
The ban is India's latest effort to balance export revenue against the needs of its
textile industry. Last year, the national government had capped cotton exports,
but by August it had to remove those restrictions because India's cash-strapped
textile mills weren't buying the fiber. It extended the unrestricted exports for the
2011-12 crop year, which began Oct. 1, estimating shipments would total no
more than seven million bales.
Instead, exporters have shipped out 9.4 million bales of cotton, and the crop
year is more than six months from its end. The Indian government had expected
it would have 8.4 million bales available for export based on its projections for
domestic demand.
India's cotton-export ban comes amid expectations for a record global crop.
Above, cotton yarn dries in India.
Monday's ban includes cotton that has been registered with the government for
export but which hasn't been shipped yet, the Commerce Ministry said."With the
export ban, the merchants that had sold that cotton that has not been exported
out of India will have to cover elsewhere to fulfill their contracts[and pay] the
price difference between the Indian cotton and other growths," said Phil Bogel,
vice president of Dallas-based Toyo Cotton Co., a firm that buys and sells cotton
but doesn't do business in India.
Citation: online.WSJ.com; March 6, 2012, 12:53 p.m. ET
The effect of imposing the export ban on cotton exports is:
1. Which diagram in Figure 2 best characterizes the regulation described here?
(circle just one)
A
B
C
D
15
2. Relative to the equilibrium without regulation where Is the shadow price due to
the regulation? (circle just one)
a)
Above equilibrium
b)
Below Equilbrium
3. Describe the government failures and type of disequilbrium that will occur due to
this kind of regulation. Be thorough
High shadow price provides people incentive to export cotton illegally. Illegal
(black) market requires expensive government enforcement.
ARTICLE 4. Capitol Hill Scramble on Gas Prices Gains Pace
By TENNI LLE TRACY
WASHINGTON—Joining the escalating debate over rising gasoline prices and a rush by
lawmakers on both sides of the aisle to assign blame for steeper fuel costs, a handful of Senate
Democrats unveiled a bill Wednesday that would limit speculative trading in the oil markets.
The bill, written by Sen. Bernie Sanders (I., Vt.) and five Democrats, would force regulators to
pass rules within 14 days to reduce speculative trading in the oil markets. The Commodity
Futures Trading Commission is in the process of developing such limits, but its rules won't be …
"Wall Street speculators have turned the oil markets into a crude-oil casino," said Rep. Markey,
ranking member on the House Natural Resources Committee.
Testifying at the same hearing, an advocate for oil-market changes said Congress should
ban commodity-index funds, a financial instrument that tracks commodity
futures. "The effect of this excess speculation is dramatic and is seriously damaging the
commodity markets," said Better Markets President Dennis Kelleher.
…
http://online.wsj.com/article/SB10001424052702304724404577295673035610082.html?KEYWO
RDS=Capitol+Hill+Scramble+on+Gas+Prices+Gains+Pace
1. Which diagram in Figure 2 best characterizes the “ban” described here? (circle
just one)
A
B
C
D
2. Relative to the equilibrium without regulation where Is the shadow price due to
the regulation? (circle just one)
a)
Above equilibrium
b)
Below Equilbrium
3. Describe the government failures and type of disequilbrium that will occur due to
this kind of regulation. Be thorough
High shadow price provides people incentive to gamble with energy contracts
illegally. Illegal (black) market requires expensive government enforcement.
16