Econ 100A Ans to PS4

Econ 100A Ans to PS4 - Department of Economics University...

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Econ 100A-Spring 2008 Page 1 PS4 Answer Sheet Department of Economics Spring 2008 University of California Prof. Woroch Economics 100A PROBLEM SET 4 ANSWER SHEET I. TRUE or FALSE and EXPLAIN 1. Concerned about the recent upward trend in corn prices, the U.S. government evaluates trade policies that would keep the domestic price near $5 per bushel of corn. If it wants to minimize the reduction of social surplus that results, it should place a quota on the amount of corn imported, rather than placing a tariff on imports. False. For a tariff that would support a $5 domestic price (i.e., equal to the difference between $5 and the world price of corn), there is an import quota that will have the same effect. However, in the case of a tariff, the U.S. government would collect tariff revenues (equal to the tariff times the amount of corn imported) whereas under a quota, no revenues would accrue. In fact, foreign corn exporters who succeed in selling in the U.S. at domestic prices will earn this as an economic rent on that right. 2. A minimum wage always results in unemployment--in other words, there are more individuals willing to work at the minimum wage rate than there are jobs available. True and False. A minimum wage law places a floor on the equilibrium price in the labor market: no one may work for a wage that is below the statutory minimum. If that floor is “binding,” meaning that in its absence the wage would be less, then supply of labor exceeds its demand. In other words, “more individuals willing to work at the minimum wage rate than there are jobs available” at the minimum wage level. But it is possible that the minimum wage is not binding, in which case it would not result in unemployment defined in this way. Incidentally, empirical research has concluded that increases in the minimum wage are not necessarily associated with increases in unemployment. 3. Many journalists have described the Organization of Petroleum Exporting Countries (OPEC) as a “cartel.” This term is used incorrectly because, in practice, OPEC countries produce dramatically different levels of output from each other. False: Members of cartels collude in order to establish price and quantity. A profit-maximizing cartel should set production for member such that the marginal cost is equal to the marginal revenue. This marginal cost is equal for all producers. However, this rule leads directly to different levels of output when producers have different marginal costs for given quantities of output. Therefore, different levels of output are consistent with a cartel. Research has established that OPEC might not meet the criteria for a cartel for other reasons, for example, the prices and quantities established by OPEC members are not always the profit-maximizing. 4.
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Econ 100A Ans to PS4 - Department of Economics University...

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