BEA111 Principles of Economics 1

Assignment #2

Due: April 6 by 4:00pm

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Question 1

Assume that the demand curve for cigarettes if highly inelastic and the supply curve for cigarettes is highly elastic. Consider two policy proposals:

a) Suppose the government advertises the harmful health effects of smoking. For example, many governments have imposed plain packaging laws or require cigarette producers to put pictures showing the harmful effects of smoking on their packages. The objective of these policies is to shift consumers’ tastes away from smoking. Use the supply and demand model to analysis the potential implications of this policy. Will the effect from this policy be larger on price or on quantity? Use a properly labelled diagram to support your arguments.

b) Suppose that the government decides to impose a per-unit tax collected from the manufacturers of cigarettes. In this case, will the effect be larger on price or on quantity? Use a properly labelled diagram to support your arguments.

c) Compare your arguments in parts a) and b). If you were advising the government on their cigarette policy, which policy would you argue the government should pursue? You must support you arguments by linking back to your analysis in parts a) and b).

d) Can you think of any other issues to consider when deciding on this policy that perhaps is not captured in the supply and demand model? Explain.

Question 2

Suppose the government wishes to ensure that its citizens can afford adequate housing. The government is considering three policy options:

a) The government passes a law requiring that all rents be cut by ¼. Predict what effect this policy will have in the short run AND long run. Use a supply and diagram model to support your analysis.

b) The second policy option is to offer a subsidy to all builders of homes. Predict what effect this policy will have in the short run AND the long run. Use a supply and diagram model to support your analysis.

c) The third policy involves providing a subsidy directly to renter equal to ¼ the rent that they pay. Predict what effect this policy will have in the short run AND the long run. Use a supply and diagram model to support your analysis.

d) If you are advising the government on its housing policy which policy would you advise the government to implement? Use your analysis in parts a), b), and c) in your arguments. That is, support your arguments using the supply and demand models you have developed in parts a), b), and c).

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