Unit Macroeconomics 3 Homework Answers Chapter 3 5. Suppose that the supply schedule of Maine lobsters is as follows:
Suppose that Maine lobsters can be sold only in the United States. The U.S. demand schedule for Maine lobsters is as follows:
a. Draw the demand curve and the supply curve for Maine lobsters. What is the equilibrium price and quantity of lobsters? Now suppose that Maine lobsters can be sold in France. The French demand schedule for Maine lobsters is as follows:
b. What is the demand schedule for Maine lobsters now that French consumers can also buy them? Draw a supply and demand diagram that illustrates the new equilibrium price and quantity of lobsters. What will happen to the price at which fishermen can sell lobster? What will happen to the price paid by U.S. consumers?
What will happen to the quantity consumed by U.S. consumers? 5. a. The equilibrium price of lobster is $15 per pound and the equilibrium quantity is 600 pounds, point E in the accompanying diagram.
b. The new demand schedule is obtained by adding together, at any given price, the quantity demanded by American consumers and the quantity demanded by French consumers, as shown in the following table.
The new equilibrium price of lobster is $20 per pound and the new equilibrium quantity is 700 pounds, point E in the accompanying diagram. The opportunity to sell to French consumers makes Maine fishermen better off: they sell more lobster and at a higher price than before. U.S. consumers, however, are made worse off: they must pay a higher price for lobster ($20 versus $15 per pound), and as a result consume less lobster (400 versus 600 pounds).
14. The small town of Middling experiences a sudden doubling of the birth rate. After three years, the birth rate returns to normal. Use a diagram to illustrate the effect of these events on the following. a. The market for an hour of babysitting services in Middling today b. The market for an hour of babysitting services 14 years into the future, after the birth rate has returned to normal, by which time children born today are old enough to work as babysitters c. The market for an hour of babysitting services 30 years into the future, when children born today are likely to be having children of their own 14. a. There are more babies today, so the demand for an hour of babysitting services has increased. This produces a rightward shift of the demand curve for babysitting services from D1 to D2, resulting in a rise in the equilibrium price and quantity as the equilibrium changes from E1 to E2.
b. The children born today will cause an increase in the supply of babysitters available 14 years from now, when there will be a rightward shift of the supply curve for babysitting services from S1 to S2. It will result in a lower equilibrium price and a higher equilibrium quantity as the equilibrium changes from E1 to E2.
c. It is likely that there will be an increase in the birthrate 30 years from now. Therefore, there will be an increase in the demand for babysitting services, shifting the demand curve rightward from D1 to D2. It will result in a higher equilibrium quantity and price as the equilibrium changes from E1 to E2.
Chapter 4 5. As noted in the text, European governments tend to make greater use of price controls than does the American government. For example, the French government sets minimum starting yearly wages for new hires who have completed le bac, certification roughly equivalent to a high school diploma. The demand schedule for new hires with le bac and the supply schedule for similarly credentialed new job seekers are given in the accompanying table. The price here--given in euros, the currency used in France--is the same as the yearly wage.
a. In the absence of government interference, what is the equilibrium wage and number of graduates hired per year? Illustrate with a diagram. Will there be anyone seeking a job at the equilibrium wage who is unable to find one--that is, will there be anyone who is involuntarily unemployed? b. Suppose the French government sets a minimum yearly wage of 35,000. Is there any involuntary unemployment at this wage? If so, how much? Illustrate with a diagram. What if minimum the wage is set at 40,000? Also illustrate with a diagram. c. Given your answer to part b and the information in the table, what do you think is the relationship between the level of involuntary unemployment and the level of the minimum wage? Who benefits from such a policy? Who loses? What is the missed opportunity here? 5. a. The equilibrium wage is 30,000, and 290,000 workers are hired. There is full employment: nobody is involuntarily unemployed. The equilibrium is at point E.
b. With a minimum wage of 35,000, there is a surplus of workers of 60,000 (the quantity supplied is 310,000 and the quantity demanded is 250,000). That is, there are 60,000 workers that are involuntarily unemployed. At a minimum wage of 40,000, there is a surplus of workers of 100,000: this is the number of involuntarily unemployed workers.
c. The higher the minimum wage, the larger the amount of involuntary unemployment. The people who benefit from this policy are those workers who succeed in getting hired: they now enjoy a higher wage. Those workers who do not get hired, however, lose: if the market were allowed to reach equilibrium, more workers would be employed. Employers also lose: fewer employers can now afford to hire workers, and they need to pay higher wages. The missed opportunity is that there are workers who want to work at a wage lower than the minimum wage and firms that would willingly hire them at a lower wage; but because the wage is not allowed to fall below the minimum wage, these hires are not made.
7. For the last 70 years the U.S. government has used price supports to provide income assistance to American farmers. At times the government has used price floors, which it maintains by buying up the surplus farm products. At other times, it has used target prices, a policy by which the government gives the farmer an amount equal to the difference between the market price and the target price for each unit sold. Consider the market for corn depicted in the accompanying figure.
a. If the government sets a price floor of $5 per bushel, how many bushels of corn are produced? How many are purchased by consumers? By the government? How much does the program cost the government? How much revenue do corn farmers receive? b. Suppose the government sets a target price of $5 per bushel for any quantity supplied up to 1,000 bushels. How many bushels of corn are purchased by consumers and at what price? By the government? How much does the program cost the government? How much revenue do corn farmers receive? c. Which of these programs (in parts a and b) costs corn consumers more? Which program costs the government more? Explain. d. What are the inefficiencies that arise in each of these cases (parts a and b)?
7. a. With a price floor of $5, the quantity of corn supplied is 1,200 bushels. The quantity demanded is only 800 bushels: there is a surplus of 400 bushels. The government therefore has to buy up the surplus of 400 bushels, at a price of $5 each: the program costs the government 400 $5 = $2,000. Corn farmers sell 1,200 bushels (800 to consumers and 400 to the government) and therefore make 1,200 $5 = $6,000 in revenue. b. If the government sets a target price of $5, the market reaches equilibrium at a price of $3 and a quantity of 1,000 bushels. There is no surplus (or shortage). The government does not buy any corn under this policy. On each bushel sold the government pays farmers $2 (to make up the difference between the market price of $3 and the target price of $5), so the government pays a total of 1,000 $2 = $2,000. Corn farmers sell 1,000 bushels and make $5 for each bushel ($3 come from consumers and $2 from the government), for a total of $5,000 of revenue. c. The price-floor policy is more expensive for consumers: they pay $5 per bushel (compared to the $3 under the target price policy). Both policies are equally expensive for the government. d. When there is a price floor for corn, the most striking inefficiency is the waste of resources (the corn bought by the government is presumably thrown away). This does not occur under the target price policy: under that policy all corn that is produced is also bought by consumers.