Assignment 5

Assignment 5 – Principles of Economics

Ans 1


If the price ceiling is above the equilibrium price, the price ceiling is not binding. Market forces will naturally move the economy to the equilibrium and there will be no effect on price or quantity sold as a result of the price ceiling

If the price ceiling is below the equilibrium price, the price ceiling is binding. The quantity demanded in this case will be more than the quantity supplied. This will result in a shortage of tickets. The policy results in less number of people to attend classical music concerts.

















Ans 2

Since the price floor(Pf) is binding, it will be higher than the equilibrium price. At this floor price, the Quantity demanded(Qd) will be less than the quantity supplied(Qs). So there will be a surplus of chees(Qs-Qd) in the market.
This is possible if the price elasticity of the demand for cheese is greater than one (elastic). In this case, the percentage rise in price will be less than percentage decline in the quantity demanded. This will result in decline of total revenue.
The producers benefit from this policy because they will produce the Qs quantity and can sell that to government at the floor price to increase their total revenue. The consumers will still buy Qd amount and will neither gain nor lose. The losers will be the taxpayers because the government will buy the excess supply and will distribute that cost to the taxpayers.














Ans 3.

From the figure above, it is clear that the equilibrium price is $400 and equilibrium quantity is 300
Since the price ceiling is now 300, it is less than the equilibrium price and is binding. The new market price is $300 and at this price number of bedrooms rented will be 200





The new market price will be 450 and the number of rooms rented will be 275



Ans 4

Before tax was implemented, Pe is the price received by the suppliers; this same price was also paid by consumers. The quantity sold at this price was Qe. The difference between price paid by consumers and price received by suppliers is 0.
After tax, the price received by sellers is Ps and price paid by consumers is Pb, the quantity sold is Qt.

The difference between the price received by suppliers and price paid by consumers is Pb – Ps = 0.50.

The quantity of gasoline sold decreased to Qt



Ans 5

When the senator raised the payroll tax, the cost of hiring the workers will be more. This will result in shifting the demand curve to the left. As a result the firms will hire less workers. This will lead to unemployment which will make workers worser.


Ans 6

The price paid by consumers will rise by less than $500 if the government imposes a $500 tax on luxury cars. The burden of any tax will be shared by both producers and consumers. In this case since the demand for luxury cars is more elastic the major portion of the tax will be borne by the seller.

Ans 7

a.

It will not make a difference if the tax is imposed on producers or consumers. If the tax is imposed on producers the supply curve will shift upwards by an amount of 50 cents to S2. The equilibrium quantity becomes Q2, the price paid by consumers is P2 and price received by suppliers is P2-0.50.

If tax is imposed on consumers, the demand curve shifts by an amount of 50 cents to D2. The equilibrium quantity is again Q2 and the price paid by consumer is P2, the price received by suppliers is P2-50.


b. The tax will be more effective when the demand curve is more elastic. Greater elasticity of gasoline means that percentage decrease in quantity demanded will fall more in response to the %increase in price of gasoline. The above figure gives a clear picture of this fact. D1 is the elastic demand. In this case quantity shift is Q3-Q1 when price rises to P2. The D2 curve is less elastic and the shift in quantity is Q2-Q1 when price rises to P2.
c. The consumers of gasoline will be hurt because now they now get less gasoline at a higher price.
d. Since the quantity demanded will decrease, it will also decrease the supply of gasoline. The decrease in output may throw some workers out of job. If the price elasticity of gasoline demand is more the TR will fall which might reduce the wages of the workers.


Ans 8

The market wage is W2, Q3 people are employed, Q3-Q1 people are unemployed. The total wage payments = W2*Q3

b. An increase in the minimum wage will decrease employment.

The change in employment depends only on the elasticity of demand and not on elasticity of supply because there is a surplus in the market.

c. The increase in minimum wage will increase unemployment

The change in unemployment depends on both elasticity of demand and elasticity of supply. The elasticity of demand determines the quantity of labor demanded and the elasticity of supply determines the quantity of labor supplied. The difference between quantity supplied and quantity demanded of labor determines the total unemployment.

d. If the demand of unskilled labor were inelastic, the increase in minimum wage would raise the total wage paid to the unskilled workers. This is because since the demand is inelastic the percentage decline in employment will be less than the % rise in wage, so total wage payment will increase.

If the demand were elastic, total wage payment would decline because in that case the % decrease in employment would be more than the % increase in wage.

11.a.



The effect of the subsidy is a shift in the demand curve from D1 to D2 by 0.50 at each quantity . The effect can be seen in the figure above. The seller will now receive a price of P3 and buyer will pay a price of P2 which is equal to P3-0.50. The quantity sold before subsidy is Q1, after subsidy it will be Q2

b. Consumers are better off because they now get more icecream at the same price.
The buyers will also be better off because they will sell more at a higher price. Government is the loser who pays the amount that is subsidized.