# ch9_example2 - ( 29 ( 29 1 12 5,000 10,004 5,000 12 90,024....

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The demand and supply functions for pizza in the local market are: 20,000 833 = - D Q P and 5,000 417 . = + S Q P Calculate consumer and producer surplus in this market. If the minimum wage is increased by \$2 per hour, the new market supply curve becomes: 4,000 417 . ′ = + S Q P Calculate the loss in consumer and producer surplus in the pizza market due to this change. Solution: First we must determine the market equilibrium quantity and price. To do this, we set quantity demanded equal to quantity supplied and solve for equilibrium price. 20,000 833 5,000 417 12. = - = = + = D S Q P Q P P At a price of \$12, the quantity exchanged will be: 10,004. The choke price (lowest price such that no units are transacted) is \$24. The consumer surplus is ( 29 1 24 12 10,004 60,024. 2 = - = CS Producer surplus is
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Unformatted text preview: ( 29 ( 29 1 12 5,000 10,004 5,000 12 90,024. 2 = +-= PS If the new minimum wage shifts market supply, the new equilibrium price is 20,000 833 4,000 417 12.80. ′ =-= = + ⇒ = D S Q P Q P P At a price of \$12.80, the quantity exchanged will be: 9,337.6. The choke price (lowest price such that no units are transacted) is \$24. The consumer surplus is ( 29 1 24 12.80 9,337.6 52,290.56. 2 ′ =-= CS Producer surplus is ( 29 ( 29 1 12.80 4,000 9,337.6 4,000 12.80 85,360.64. 2 = +-= PS The change in societal welfare in the pizza market due to the new minimum wage is: ( 29 ( 29 137,651.2 150,048 12,396.80. ′ ′ ∆ = +-+ =-= -W CS PS CS PS The loss in welfare in the local pizza market is 12,396.80 or 8.3%....
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## This note was uploaded on 04/07/2009 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.

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