Homework#4_Fall2011 - 195.603 Applied Microeconomics...

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Unformatted text preview: 195.603 Applied Microeconomics Professor: Carey Borkoski, Ph.D. Homework #4 – Due September 19th Directions – Please answer the following questions on a separate sheet of paper. If applicable, illustrate with a graph or calculations. (40 points) 1. Minimum Wage Analysis a. Is this pricing policy an example of a price ceiling or a price floor? (3pts) b. Using a supply and diagram, show a labor market with a binding minimum wage. Sketch a graph to show those who are helped by the minimum wage and those who are hurt by the minimum wage and explain why this is the case. (7pts) 2. Use the graph shown, answer the following questions: 10 price 9 S 8 7 6 5 4 D 3 2 1 D after tax 10 a. b. c. d. e. f. g. h. 20 30 40 50 60 70 80 quantity What is the equilibrium price in this market before the tax? (1pt) What is the amount of the tax? (1pt) How much will the buyer pay for the product after the tax is imposed? (1pt) How much of the tax will buyers pay? (1pt) How much of the tax will the sellers pay? (1pt) Why does the seller bear more of the burden of this tax? (1pt) As a result of the tax, what has happened to the level of market activity? (2pt) Would answers to these questions change if the tax had been levied on the sellers? Why or why not? Use the graph to support your answer. (2pt) 3. How does elasticity affect the burden of a tax? Justify your answer using supply and demand graphs (10pts). 4. Using the previous problem complete a welfare analysis of the implementation of this tax. With a graph, show the change in consumer and producer surpluses and overall surplus losses or gains (if any, exist). (10 points) ...
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