MEL 6
Suppose that you have been hired to analyze the impact on employment from the imposition of a minimum wage in the labor market. Further suppose that you estimate the supply and demand functions for labor, where L stands for the quantity of labor (measured in thousands of workers) and W stands for the wage rate (measured in dollars per hour): Demand: LD = 90−6W Supply: LS = 4W First, calculate the free-market equilibrium wage and quantity of labor. The competitive market equilibrium wage is $9 your response here per hour. The competitive market equilibrium quantity of labor is 36 thousand workers. Now suppose the proposed minimum wage is $12. How large will the surplus of labor in this market be? With a minimum wage of $12 per hour, the surplus will be 30 thousand workers.
1. Set LD = LS to find P 2. Using that P, find the LD in LD 3. Using the minimum wage as W, solve for LS in LS 4. Using the minimum wage as W, solve for LD in LD 5. Using the units I just found do: LS - LD P: LD = LS P: 90−6W = 4W (Desmos) P: 9 Q: LD = 90 - 6W Q: LD = 90 - 6 (9) (Desmos) Q: 36 LS: 4W LS: 4 (12) (Desmos) LS: 48 LD: 90 - 6W (Desmos) LD: 90 - 6(12) LD: 18 LS - LD 48 - 18 30
Suppose market demand is QD=60−5P and market supply is QS=20+5P. The market equilibrium price is $4 and the equilibrium quantity is 40 units. Suppose the government institutes a price floor of $5.00 The price floor will result in a surplus of 10 units.
1. Set QD = QS to find P 2. Using that P, find the QD in QD 3. Using the price floor as P, solve for QS in QS 4. Using the price floor as P, solve for QD in QD 5. Using the units I just found do: QS - QD P: QD = QS P: 60 - 5P = 20 + 5P (Desmos) P: $4 Q: QD = 60 - 5P Q: QD = 60 - 5(4) (Desmos) Q: 40 QD: QD = 60 - 5P QD: QD = 60 - 5(5) (Desmos) QD: 35 units QS: QS = 20+5P QS: QS = 20+5(5) (Desmos) QS: 45 units QS - QD 45 - 35 = 10 units, and since 10 is positive it's a surplus.
The figure illustrates the market for apples in which the government has imposed a price floor of $12 per crate. How many crates of apples will be sold after the price floor has been imposed? 18 million crates of apples per year. Will there be a shortage or surplus? If there is a shortage or surplus, how large will it be? There will be a surplus of 6 million crates of apples per year. Will apple producers benefit from the price floor?
At a price of $12 per crate, where blue and black intersect is at a quantity of 18 million. Quantity where red and black interest - quantity where blue and black intersect 24 - 18 = 6 million, since 6 million is positive it's a surplus. A. Apple producers who are able to sell their apples at the $12 price per crate will benefit. B. Apple producers who are not able to sell their apples will not benefit. C. Total revenue for apple producers as a group will decrease from $220 million to $216 million. D. Both a and b. E. All of the above. All of the above
The market supply and market demand curves for a magazine highlighting events and happenings for a metropolitan area are illustrated in the figure to the right. If the magazine publisher charges a weekly subscription price of $4.00, what will be the resulting deadweight loss, if any? Deadweight loss will be $4.5 thousand. (Enter your response rounded to two decimal places.)
At a price of 4.00, the quantity demanded is 2. The equilibrium quantity (where the lines intersect) is 5. .5 ( Price 2 - Price 1) * (Quantity 2 - Quantity 1) .5 ( the price where black and blue intersect - at the quantity black and blue intersect but on the red line and its price, like here black and blue intersect at the quantity of 2 and quantity 2 on the red line is at $1.00 ) * ( quantity where blue and red intersect - quantity of where black and blue intersect) 0.5( 4 - 1 ) * ( 5 - 2 ) = 4.5 thousand
Suppose that you are the vice president of operations of a manufacturing firm that sells an industrial lubricant in a competitive market. Further suppose that your economist gives you the following supply and demand functions: Demand: QD = 48−2P Supply: QS = −12+P. What is the consumer surplus in this market? Consumer surplus is $16. What is the producer surplus? Producer surplus is $32
Consumer Surplus: 1. Set QD = QS and solve for P ( also known as EP) 2. Use that P (EP) to solve for Q in QD (EQ) 3. Set QD to 0 and solve for P (DI). 4. Use this formula: CS = 0.5 * (DI - EP) * EQ EP: 48 -2P = -12 + P (put it in Desmos) EP/ P = 20 EQ: 48 - 2(20) (Desmos) EQ = 8 DI: 0 = 48 -2P (Desmos) DI = 24 CS = 0.5(24-20) *8 (Desmos) CS = 16 Producer Surplus: 1. Set QS = 0 and solve for P (SI) 2. Use this formula: PS = 0.5 * (EP - SI) * EQ SI: 0 = -12+P (Desmos) SI = 12 PS = 0.5 * (20 - 12) * 8 (Desmos) PS = 32
The diagram to the right shows a market in which a price floor of $3.50 per unit has been imposed. With the price floor, consumer surplus is $11,250 producer surplus is $41,250 deadweight loss is $10,000 and surplus transferred from consumers to producers is $15,000.
Consumer Surplus: Area of the topmost (Green Triangle) Area of a Triangle: 0.5 * Base * Height 0.5 * 1.5 * 15(thousand) CS: 11.25 --> 11.25 *1,000 CS: 11,500 Producer Surplus: Everything before the first dotted line and under the price floor (The red rectangle + triangle) Break the shape up where the red dotted line is so it's now a rectangle and a triangle then add them together! Area of a Rectangle: Base * Height 15(thousand) * 2 = 30 --> 30 * 1,000 = 30,000 Area of a Triangle: 0.5 * Base * Height 0.5 * 15(thousand) * 1.5 = 11.25 --> 11.25 * 1,000 = 11,250 PS: 30,000 + 11,250 PS: 41,250 Deadweight: Area under the price and demand but above the supply until the dotted line (light blue) Area of a Triangle: 0.5 * Base * Height DWL: 0.5 * (3.5 - 1.5) * ( 25 (thousand) - 15 (thousand)) DWL: 10 --> 10 *1,000 = 10,000 Surplus Consumer to Producer: Yellow Rectangle Area of a Rectangle: Base * Height SCP: (3.50 - 2.50) * 15(thousand) SCP: 15 --> 15 * 1,000 = 15,000
Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. In the diagram, deadweight loss is equal to the area(s):
C & E
Suppose that the government sets a price floor for milk that is above the competitive equilibrium price. Identify the price and quantity sold when there is a price floor. Then show the change in economic surplus caused by the price floor. (Note: If you have trouble graphing the triangle, be sure to drag the "Quantity sold" label out of your way so that you can plot all three triangle points.) 1.) Use the point drawing tool to identify the quantity that is sold and the price with the price floor. Label the point 'Quantity sold'. 2.) Use the triangle drawing tool to shade the change in economic surplus as a result of the price floor. If there is an increase in surplus, label it 'new economic surplus'; if there is a decrease in surplus, label it 'deadweight loss'.
DWL: the triangle Quantity Sold: use the point drawing tool where blue and black intersect farthest to the right.
Can economic analysis provide a final answer to the question of whether the government should intervene in markets by imposing price ceilings and price floors? Why or why not?
Economic analysis cannot provide such an answer because it seeks to address positive questions such as "what is."
Use the information on the kumquat market in the following table to answer the questions. (Quantities are given in millions of crates per year.) The equilibrium price is $20 and the equilibrium quantity is 100 million crates. How much revenue do kumquat producers receive when the market is in equilibrium? Kumquat producers receive 2.0 Suppose the federal government decides to impose a price floor of $30 per crate. Assume that the government does not purchase any surplus kumquats. Now how many crates of kumquats will consumers purchase? Consumers will purchase 80 million crates of kumquats. How much revenue will kumquat producers receive? Kumquat producers will receive 2.4 billion in revenue.
Equilibrium price and quantity are where the red and blue lines intersect. $20 and 100 million Equilibrium price * equilibrium quantity 20 * 100 = 2,000 but make it into a decimal, 2.0 Quantity where blue and black intersect: 80 million Equilibrium price * quantity where black and blue intersect 30 * 80 = 2,400 but make it into a decimal, 2.4
Use the information on the kumquat market in the table to answer the questions. (Quantities are given in millions of crates per year.) The equilibrium price is $20 and the equilibrium quantity is 120 million crates. (Enter your responses as integers.) Suppose the federal government imposes a price floor of $30 per crate and purchases any surplus kumquats from producers. Now how much revenue will kumquat producers receive? Kumquat producers will receive $6.0 billion in revenue. (Enter your response rounded to one decimal place.) 1.) Use the rectangle drawing tool to shade in the revenue received by kumquat producers before the price floor. Properly label the shaded area. 2.) Use the rectangle drawing tool to shade in the revenue received by kumquat producers after the price floor. Properly label the shaded area. 3.) Use the rectangle drawing tool to shade in the area represe
Equilibrium price and quantity are where the red and blue lines intersect. $20 and 120 million Price where blue intersects the black * quantity where red intersects the black 30 * 200 = 6000, make it into a decimal 6.0
Use the information in the following table (and in the graph) on the market for apartments in Bay City to answer the following questions. In the absence of rent control, what is the equilibrium rent and the equilibrium quantity of apartments rented? Equilibrium rent is $400 and the equilibrium quantity is 175 thousand apartments. In equilibrium, will there be any renters who are unable to find an apartment to rent or any landlords who are unable to find a renter for an apartment? No Suppose the government sets a ceiling on rents of $300 per month. What is the quantity of apartments demanded, and what is the quantity of apartments supplied? With the price ceiling, the quantity demanded is 200 thousand apartments and the quantity supplied is 150 thousand apartments. Assume that all landlords abide by the law. Compare the economic surplus in this market when there is no price cei
Equilibrium rent and quantity: Where red and blue intersect Price: $400 Quantity: 175 Quantity demand and supply intersect: (200, 150) At a quantity of 150, the price is $500 on the supply line.
Briefly explain whether you agree with the following statement: "A lower price in a market always increases economic efficiency in that market."
I disagree, because economic efficiency declines if price falls below the market equilibrium.
Suppose that initially the gasoline market is in equilibrium, at a price of $2.50 per gallon and a quantity of 75 million gallons per month. Then a war in the Middle East disrupts imports of oil into the United States, shifting the supply curve for gasoline from S Subscript 1 to S Subscript 2. The price of gasoline begins to rise, and consumers protest. The federal government responds by setting a price ceiling of $3.50 per gallon. Use the graph to answer the following questions. If there were no price ceiling, what would be the equilibrium price of gasoline, the quantity of gasoline demanded, and the quantity of gasoline supplied? The equilibrium price would be $4.50, the quantity demanded would be 55 million gallons per month, and the quantity supplied would be 55 million gallons per month. Now assume that the price ceiling is imposed and that there is no black market in gaso
No price ceiling equilibrium means the light red and blue lines that intersect above the black line. Price: $4.50 Both the supply and demand intersect at quantity 55 above the black line. Price ceiling imposed: Price is now where the black line is: 3.50 Demand: Quantity where the black and blue line intersect: 65 Supplied: Quantity where the light red and black line intersect: 45 Shortage: 65 - 45 = 20 Both a and b
Suppose the figure to the right represents a local cattle market. What would be the effect on this market of the local government regulating a price ceiling of $1.00 per pound? The market would have a shortage of 20 thousand pounds.
Since the price floor is under the equilibrium, it is a shortage. Blue intersects Black - Red intersects Black 70,000 - 50,000 = 20,000, they want it as a whole number, 20
Consider the market for wheat, depicted in the figure to the right. Suppose a price floor of p3 is imposed by the government. As a result of the price floor, there is a surplus of wheat. Compared with the market-clearing equilibrium, is the price floor efficient? No What area represents the loss in efficiency in terms of consumer and producer surplus resulting from the price ceiling? Use the triangle drawing tool to shade in deadweight loss. Label this shaded area 'Deadweight Loss'.
Surplus because the price floor is above the equilibrium. No, because the price ceiling creates inefficiency in the market because it prevents the price from reaching its equilibrium level.
Consider the market for corn, illustrated in the figure to the right. Suppose the government regulates a price floor of $11.00 per bushel to help corn farmers. What will be the effect of this price regulation on the market for corn? 1.) Using the point drawing tool, indicate the market price and the quantity demanded with the government's price floor. Label this point 'QD'. 2.) Using the triangle drawing tool, indicate the deadweight loss created by the government's price floor relative to the competitive equilibrium. Label this 'DWL'.
The point where the black and blue line intersect The triangle in between where the black and blue line intersect, the red and blue line intersect, and black and red line intersect.
Briefly explain whether you agree with the following statement: "If consumer surplus in a market increases, producer surplus must decrease."
The statement is incorrect. Consumer surplus (and producer/surplus) could increase by decreasing deadweight loss.
The diagram shows the market for apartments in which a price ceiling of $1,200 per apartment has been imposed. Fill in the following table summarizing the market prior to the price ceiling. Consumer Surplus: 1280 Producer Surplus: 1280 Deadweight Loss: 0 With a price ceiling: Consumer Surplus: Producer Surplus: Deadweight Loss:
With no price ceiling the equilibrium quantity and price are 1,600 and 1.6 Consumer Surplus: 0.5 * Base * Height CS: 0.5 * (3,200 - 1,600) * 1.6 CS: 1,280 Producer Surplus: 0.5 * Base * Height PS: 0.5 * 1,600 * 1.6 PS: 1,280 DWL: There is no dead weight loss when there is no price ceiling With a price ceiling of 1,200 the quantity is 1.2 Consumer Surplus: Area Triangle + Area of Rectangle Producer Surplus: PS: (0.5 * 1,200 * 1.2) PS: 720 Deadweight Loss: .5 * .8 * 400 DWL: 160
A black market is Black markets may arise
a market in which buying and selling occur at prices that violate government price regulations. in reaction to binding price ceilings.
A student makes the following argument: "A price floor reduces the amount of a product that consumers buy because it keeps the price above the competitive market equilibrium. A price ceiling, on the other hand, increases the amount of the product that consumers buy because it keeps the price below the competitive market equilibrium." Do you agree with the student's reasoning? To address this, first, add a binding price floor and a binding price ceiling. 1.) Use the line drawing tool to draw the price floor. Properly label this line. 2.) Use the line drawing tool to draw the price ceiling. Properly label this line. A price ceiling
does not increase the amount of the product that consumers buy because it creates a shortage.
Do producers tend to favor price floors or price ceilings? Why? Producers favor
price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus.
