Perfect Competition

1. Explain by means of the Supply and Demand model how the Minimum Wage creates Dead Weight Loss.

a. Dead weight loss happens because there are workers willing to work for a certain wage and firms are willing to hire them for this wage but the law says it is too low so there is a loosed opportunity for jobsb. Leads to illegal employment

Why, under conditions of perfect competition, is the demand curve downward sloping and the supply curve upward sloping?

a. Downward sloping = as the price of a good increases, people will want less of the good (because they will be looking for substitutes and they will stop consuming), and with higher prices only high values uses will remainb. Upward slopping supply curve= as the price of good increase, it will become profitable for higher cost suppliers to enter the market

1. How are monopolies and monopsonies price setters?

a. Given that they are the only buyers and sellers on the market, they set prices to maximize profit

1. Why do prices and quantity sold move to the equilibrium where quantity supplied and quantity demanded are equal in a competitive market?

a. If the price is too low buyers will outbid each other to get the goods until the price raises and there is no longer a shortageb. If the price is too high there will be a surplus and sellers will lower their prices to get the goods sold until the price comes down to the equilibriumc. So the equilibrium price is when the supply and demand are equal

1. What could explain that an increase in the minimum wage may have no effect on the unemployment rate?

a. In a monopsony where they are the only buyers of labor it can raise the wage rate without reducing employment or raising prices, the only effect would be a reduction of profits for Walmart

Give three arguments for an increase in the Minimum Wage.

a. No change since 2009 in normal minimum wage rate and drop in real minimum wage rateb. 25% drop in real minimum wage rate since 60sc. Stagnant wages for lower quintile

1. Explain by means of the Supply and Demand model how the Minimum Wage creates unemployment.

a. Since the price is too high for minimum wage this creates an unbalanced supply and demand model where the minimum wage is set too high so there is surplus meaning there is more labor being supplied by the workers than the firms needb. This creates unemployment

1. What is a monopsony?

a. Single buyerb. Walmart is the only employer (buyer of labor) in town

1. What is a monopoly?

a. Single sellerb. Single firm has patent fir new invention

1. How is it that producers and consumers under perfect competition are price takers?

a. They decide whether to produce or to buy given the prices offered on the market.

1. Gains from trade are consumer surplus plus producer surplus. Explain how we measure consumer surplus [Hint: Explain in terms of Willingness To Pay (=> Demand curve) and Price] and producer surplus [Hint: in terms of Willingness To Sell (=> Supply curve) and Price].

a. We measure consumer surplus by their willingness to pay so say a consumer is willing to pay $80 for a barrel and they buy it for $20 their gain from that sale is $60 and this $60 is said to be the consumer surplus for that buyerb. The producer surplus is their willing to sell (WTS) so if they were willing to sell at $0 but they sold for $40 that $40 is their producer surplus

1. Explain by means of the Supply and Demand model how one could argue that the EITC is "a subsidy paid for by taxpayers to Corporate America".

a. With a subsidy more people are willing to work at a given wage rate and wages will be suppressedb. This enables Walmart to hire workers at a low wage