macroeconomics 99

1.A.6.

Read Chapter 6, Price Controls. Stop when you get to taxes.

In the last chapter, we learned how and why markets come to an equilibrium. In this chapter, we consider the impact of price controls. The law of supply and demand means that markets will always try to get to equilibrium. But when it can’t get there (like when there is a binding price control), it will get as close as possible. Before you start this assignment, make sure you read the part of section 6 that deals with price controls and pay careful attention to the difference between price floors and price ceilings and the difference between a binding and nonbinding price control (both for floors and ceilings).

Consider the following supply and demand schedule for the market for fast food workers. When there are price controls, please note that the price (the wage) charged in the market might not be the same as the equilibrium price (wage). Think about what price (wage) people will ACTUALLY earn and businesses will ACTUALLY pay in each of the situations described below.

• What is the equilibrium price and quantity?
• Is the minimum wage an example of a price floor or a price ceiling?
• If the minimum wage were $10, what wage would be charged in the market?
• If the minimum wage were $10, what would be the quantity of labor supplied?
• If the minimum wage were $10, what would be the quantity of labor demanded?
• If the minimum wage were $10, what would be the quantity of labor hired?
• If the minimum wage were $10, would there be a shortage, a surplus, or would the market clear?
• If the minimum wage were $7, what wage would be charged in the market?
• If the minimum wage were $7, what would be the quantity of labor supplied?
• If the minimum wage were $7, what would be the quantity of labor demanded?
• If the minimum wage were $7, what would be the quantity of labor hired?
• If the minimum wage were $7, would there be a shortage, a surplus, or would the market clear?

1.A.7

Read chapter 7

• What is the formula for consumer surplus, for producer surplus, and for total surplus?
• Complete the table by calculating consumer surplus, producer surplus and total surplus for each of the following transactions.
  Key: P = Price, WTP = willingness to pay, Cost = cost to produce
• Draw a generic supply and demand diagram (do NOT try to use the information from #1!). Label each axis, the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity. Label the consumer surplus, producer surplus, and total surplus.

The most important thing about this chapter is that it teaches that the market outcome (the equilibrium) is efficient. Carefully read section 7-3b: Evaluating the market equilibrium. In a few sentences, explain why markets are efficient.

1.A.9

Read chapter 9

Before beginning this assignment, please read chapter 9 and refer to it as you form your answers.

Using a supply and demand diagram, draw a graph for a small country that EXPORTS sugar. Be sure that you label the domestic supply, domestic demand, autarky (no trade equilibrium) price, and autarky (no trade equilibrium) quantity. Also, label the world price, quantity produced domestically under free trade, quantity consumed domestically under free trade, and the amount of sugar exported. Finally, label the gains to free trade.