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Read the short article “Bloomberg sets sights on smokers: $10.50 price floor for cigarettes” by Jessica Chasmar, Washington Times:
http://www.washingtontimes.com/news/2013/mar/28/bloomberg-sets-sights-smokers-1050-price-floor-cig/
The article talks about the bill that sets a price floor on cigarettes. Chapter 4 also discusses price controls and possible inefficiencies that result from price
controls. Write a short essay (no more than 2 pages) explaining:
1) what is a price floor, and when is a price floor binding/non-binding;
2) list 5 inefficiencies that may result from establishing a price floor;
3) discuss the price floor in the article:
a. what is the reason for the proposed price floor on cigarettes (as explained in the article)?
b. what would happen to the market demand/supply if the price floor were established?
c. apply the 5 inefficiencies (inefficiently low quantity, inefficient allocation of sales, wasted resources, inefficiently high quality, illegal activity) to the
particular case of price floor on cigarettes; what do they look like?
Bonus points (10 percent): Discuss how effect of the price floor might be different in the case of cigarettes compared to other goods (Hint: smokers often have an
addiction problem, which means their demand may be affected differently)
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