aps2 - Economics 102 Introductory Macroeconomics Spring...

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Economics 102 Introductory Macroeconomics - Spring 2005, Professor J. Wissink Problem Set 2 – ANSWERS 1. a) The equilibrium price is $30,000 and the equilibrium quantity is 50 thousand workers. b) There is a surplus of 30,000 laborers (i.e. 70,000-40,000 = 30,000) c) The number of workers satisfying conditions (a) and (b) is 10,000 (i.e. 50,000-40,000). These are the workers who were hired by the firms that had a willingness to pay salaries between $30,000 and $40,000 and that reduced their personnel due to the new price floor. The cost of the program to the government will be $7,000 x 10,000 = $70 millions. Tompkins County Labor Market Supply Demand 0 10 20 30 40 50 60 0 10 20 30 40 50 60 70 80 90 100 Workers (thousands) Salary (thousand $) Tompkins County Labor Market Supply Demand 0 10 20 30 40 50 60 0 10 20 30 40 50 60 70 80 90 100 Workers (thousands) Salary (thousand $)
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2. Suppose the demand and supply for newspapers are described by the following equations: Demand: X D = 1450 – 100P and Supply: X S = -125 + 125P (Where "P" is measured in dollars and X in number of newspapers, in thousands.) a) By solving X D = X S it can be shown that the equilibrium price P* = 7 and the equilibrium quantity X* = 750 . b) The new equilibrium under X D = 1000 – 100P is P* = 5 and X* = 500 . c) A price floor of $4 per newspaper will not have any effect in the workings of the market since it is below the new equilibrium price of $5 per newspaper. However if the price floor is $6 per newspaper, then the price floor will be binding and quantity supplied will be X S = 625 , while the quantity demanded will be X D = 400 , so there will be a surplus of newspapers of 225. Newspapers Market Demand 1 Supply 0 2 4 6 8 10 12 14 16 0 500 1000 1500 2000 Newspapers (thousands) Price (dollars) Newspapers Market Demand 1 Supply Demand 2 0 2 4 6 8 10 12 14 16 0 500 1000 1500 2000 Newspapers (thousands) Price (dollars)
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