GOVERNMENT ACTIONS IN 6 MARKETS

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96 CHAPTER 6, 1 What is a minimum wage and what are its effects if it is set. above the equilibrium wage, A minimum wage is a price floor applied to the labor market A. minimum wage is a government imposed regulation that makes it. illegal to charge or pay a wage rate lower than a specified level. If the minimum wage is set above the equilibrium wage it creates a. surplus of labor unemployment and decreases workers and firms. 2 What are the effects of a minimum wage set below the equilibrium. If the minimum wage is set below the equilibrium wage then the law. has no impact on the labor market equilibrium wage and quantity. 3 Explain how scarce jobs are allocated when a minimum wage is in. If a minimum wage is set above the equilibrium wage the ability of. the competitive market to allocate resources is thwarted and other. means must be used Sometimes the method used is first come first. served so that those who are first in line to apply for openings are. given the jobs Other times discrimination is used so that those. from favored groups are allocated the jobs, 4 Explain why a minimum wage creates an inefficient allocation of. labor resources, A competitive labor market allowed to reach its equilibrium creates. an efficient allocation of resources At the equilibrium the amount. of employment is such that the marginal social cost of labor to. workers equals the marginal social benefit from labor to firms A. minimum wage set above the equilibrium wage rate creates a surplus. of labor the quantity of labor supplied exceeds the quantity of. labor demanded The minimum wage reduces employment so that it is. less than the efficient amount,5 Explain why a minimum wage is unfair.
Workers who receive wage hikes and retain their jobs gain from the. minimum wage but workers who lose their jobs and workers who must. extensively search for a job lose Those who keep or find jobs are. not necessarily the least well off so the minimum wage fails the. fair results approach to fairness And the minimum wage also fails. the fair rules approach to fairness because the minimum wage blocks. voluntary transactions that otherwise would occur, 1 How does the elasticity of demand influence the incidence of a. tax the tax revenue and the deadweight loss, The more elastic the demand for a given supply the smaller the. increase in the price paid by the buyers and the greater the. decrease in the price received by the sellers which means that the. incidence on buyers is smaller Additionally the more elastic the. 2014 Pearson Education Inc,GOVERNMENT ACTIONS IN MARKETS 97. demand the smaller the quantity bought so the smaller the tax. revenue and the larger the deadweight loss, 2 How does the elasticity of supply influence the incidence of a. tax the quantity bought the tax revenue and the deadweight. The more elastic the supply for a given demand the larger the. increase in the price paid by the buyers and the smaller the. decrease in the price received by the sellers which means that the. incidence on buyers is larger Additionally the more elastic the. supply the smaller the quantity bought so the smaller the tax. revenue and the larger the deadweight loss,3 Why is a tax inefficient.
The imposition of a tax on a market causes a wedge to be driven. between the price received by the seller and the price paid by the. buyer This causes the marginal social benefit from the last unit. sold to be higher than its marginal social cost and the market will. under produce the good or service being taxed If more of the good. or service were produced the marginal social benefit gained would. be greater than the marginal social cost incurred and the net. benefit to society would increase,4 When would a tax be efficient. A tax is efficient that is creates no deadweight loss when demand. is perfectly inelastic or supply is perfectly inelastic In both. these cases a tax does not change the quantity produced and so. creates no deadweight loss, 5 What are the two principles of fairness that are applied to tax. The two principles of fairness are the benefits principle and the. ability to pay principle The benefits principle asserts that people. should pay taxes equal to the benefits they receive from the. government provided services The ability to pay principle asserts. that people should pay taxes according to how easily they can bear. the burden of the tax, 1 Summarize the effects of a production quota on the market price. and the quantity produced, A production quota set below the equilibrium quantity raises the. price and decreases the quantity,2 Explain why a production quota is inefficient.
A production quota is inefficient because it decreases production. As a result the marginal social benefit of the last unit produced. exceeds the marginal cost Because the marginal benefit exceeds the. marginal social cost there is a deadweight loss,2014 Pearson Education Inc. 98 CHAPTER 6, 3 Explain why a voluntary production quota is difficult to operate. A voluntary quota is difficult to operate because a production quota. results in a massive incentive to cheat on the production quota by. increasing production A production quota decreases the quantity. produced By decreasing the quantity produced a production quota. raises the price and reduces the marginal social cost of the last. unit produced Because the price exceeds the marginal social cost. producers have an incentive to increase their production beyond the. quota amount to boost their profit, 4 Summarize the effects of a subsidy on the market price and the. quantity produced, A subsidy increases the price received by sellers shifts the supply. curve rightward and places a wedge between the marginal social. benefit and marginal social cost of producing the good The subsidy. creates a deadweight loss a higher equilibrium quantity sold over. production and a lower price paid by the consumers The subsidy. increases farm revenues to all farmers,5 Explain why a subsidy is inefficient.
A subsidy creates inefficiency because a subsidy leads to a lower. price and increased production Marginal social benefit equals the. price and so the lower price signals that the marginal social. benefit falls And the increased production means that the marginal. social cost of production rises So at the level of production with. a subsidy the marginal social benefit is less than the marginal. social cost and inefficiency is created, 1 How does the imposition of a penalty for selling an illegal drug. influence demand supply price and the quantity of the drug. If the penalty is levied on the seller the penalty is added to the. minimum price required for supplying the good or service The demand. curve remains unchanged but the supply curve shifts leftward so. that the vertical distance between the initial supply curve and the. supply curve with the penalty equals the dollar value of the. penalty In this case the equilibrium price of the good rises and. the equilibrium quantity decreases, 2 How does the imposition of a penalty for possessing an illegal. drug influence demand supply price and the quantity of the. drug consumed, If the penalty is levied on the buyer the penalty is subtracted. from the maximum willingness to pay for the good The supply curve. remains unchanged and the demand curve shifts leftward so that the. vertical distance between the initial demand curve and the demand. curve with the penalty equals the dollar value of the penalty In. this case the equilibrium price of the good falls and the. equilibrium quantity decreases,2014 Pearson Education Inc. GOVERNMENT ACTIONS IN MARKETS 99, 3 How does the imposition of a penalty for selling or possessing an.
illegal drug influence demand supply price and the quantity of. the drug consumed, If buyers and sellers face penalties both the demand and supply. curves shift leftward If the shift of the supply curve is larger. the equilibrium price rises and quantity decreases if the shift of. the demand curve is larger the price falls and quantity decreases. if the shifts are the same magnitude the price is unchanged and the. quantity decreases,4 Is there any case for legalizing drugs. To reduce the consumption of drugs they can be legalized and taxed. Legalizing and then taxing drugs has the benefit of raising funds. for the government that could be used to help educate people about. the danger of consuming drugs However if very high taxes are. necessary to reduce the consumption of illegal drugs to the level of. use when they were banned this will cause buyers and sellers to. engage in unreported trade in the black market and avoid the tax. through tax evasion,2014 Pearson Education Inc,100 CHAPTER 6. Answers to the Study Plan Problems and Applications. Use Figure 6 1 which shows the,market for rental housing in. Townsville to work Problems 1 and 2,1 a What are the equilibrium rent.
and equilibrium quantity of,rental housing,The equilibrium rent is 450 a. month and the equilibrium,quantity is 20 000 housing units. b If a rent ceiling is set at 600,a month what is the quantity of. housing rented and what is the,shortage of housing. The quantity of housing rented is,equal to 20 000 units If the.
rent ceiling is set at 600 per,month it is above the. equilibrium rent and so is,ineffective The rent stays at. 450 per month and the quantity rented remains at 20 000 housing. units There is no shortage of housing units Because the rent. ceiling is ineffective the market remains at its equilibrium so. there is no shortage of housing units, 2 If a rent ceiling is set at 300 a month what is the quantity of. housing rented the shortage of housing and the maximum price. that someone is willing to pay for the last unit of housing. The quantity rented is 10 000 housing units The quantity of housing. rented is equal to the quantity supplied at the rent ceiling The. shortage of housing is 20 000 housing units At the rent ceiling. the quantity of housing demanded is 30 000 but the quantity. supplied is 10 000 so there is a shortage of 20 000 housing units. The maximum price that someone is willing to pay for the 10 000th. unit available is 600 a month The demand curve tells us the. maximum price that someone is willing to pay for the 10 000th unit. Use the following news clip to work Problems 3 to 6. Capping Gasoline Prices, As gasoline prices rise many people are calling for price caps but. price caps generate a distorted reflection of reality which leads. buyers and suppliers to act in ways inconsistent with the price cap. By masking reality price caps only make matters worse. Source Pittsburgh Tribune Review September 12 2005. 2014 Pearson Education Inc,GOVERNMENT ACTIONS IN MARKETS 101.
Suppose that a price ceiling is set below the equilibrium price of. 3 How does the price cap influence the quantity of gasoline. supplied and the quantity demanded, If the price ceiling is set below the equilibrium price the. quantity of gasoline supplied decreases and the quantity of gasoline. demand increases,4 How does the price cap influence. a The quantity of gasoline sold and the shortage or surplus of. With the increase in the quantity demanded and the decrease in. quantity supplied a shortage of gasoline is created The quantity. of gasoline sold decreases from the equilibrium quantity before the. price ceiling to equal the quantity supplied at the capped price. b The maximum price that someone is willing to pay for the last. gallon of gasoline available on a black market, The maximum price someone is willing to pay for the last gallon of. gasoline available is determined by the demand curve The demand. curve is upward sloping so when the quantity of gasoline available. decreases the maximum price that someone is willing to pay for the. last gallon available increases, 5 Draw a graph to illustrate the effects of a price ceiling set. below the equilibrium price in the market for gasoline. Figure 6 2 shows the effect of a,price ceiling set below the.
equilibrium price in the market,for gasoline At the ceiling. price there is a shortage because,the quantity of gasoline. demanded 100 million gallons per,week in the figure exceeds the. quantity of gasoline supplied 98,million gallons per week. 6 Explain the various ways in which,a price ceiling on gasoline that.
is set below the equilibrium,price would make buyers and. sellers of gasoline better off or,worse off What would happen to. total surplus and deadweight loss,in this market,A price ceiling set below the. equilibrium price benefits some consumers and harms others. Consumers who are able to buy gasoline at the price ceiling without. too much search activity or have a low cost of search are made. better off Consumers who cannot buy who must undertake extensive. search activity or who have a high cost of search are made worse. 2014 Pearson Education Inc,102 CHAPTER 6, off All producers of gasoline are made worse off The total surplus. decreases and a deadweight loss is created,Use the following data to work Problems 7 to 9.
The table gives the demand and Quantity Quantity, supply schedules of teenage Wage rate demanded supplied. labor dollars hours per month,7 Calculate the equilibrium per hour. the competitive market to allocate resources is thwarted and other means must be used Sometimes the method used is first come first served so that those who are first in line to apply for openings are given the jobs Other times discrimination is used so that those from favored groups are allocated the jobs 4 Explain why a minimum wage

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