problem set 2

Topics: Supply and demand, Externality, Public good Pages: 7 (966 words) Published: December 8, 2014
PROBLEM SET 2
Name: ___________________________________

Problem Set 2 is to be completed by 11:59 p.m. (ET) on Monday of Module/Week 4.

1. The following table presents data for wages in the market for internet security professionals. (HINT: in the labor market the roles are reversed. Those who want to hire labor are the demanders. The workers enter the work force providing labor to the market place so they are the suppliers.)

Wage
Quantity Demanded
Quantity supplied
$50,000
20,000
14,000
$60,000
18,000
18,000
$70,000
16,000
22,000
$80,000
14,000
26,000
$90,000
12,000
30,000

What is the equilibrium wage? $60,000

Now, consider this scenario - Due to an increase in the internet security threats, the government wants to apply a price control in this market to encourage more people to become internet security professionals. Assume that a wage control is set at $75,000. Will this increase the number of people entering this labor market? Why or why not? Will this increase the number of people hired? Why or why not? This will encourage more workers because wage rate has increased. But demand for labour has decreased because the employers are now not willing to pay. Therefore, ultimately, the number of people entering this labor market will not increase.

2. Assume you are a policymaker in Washington DC. Lobbyists for the preschoolers of America have put pressure on their representatives to cap prices on graham crackers. You have been assigned a position on a new committee to study the impact of a price ceiling on graham crackers.

a) This price ceiling will have two effects. First it will result in a shortage in the market since quantity demanded will now exceed quantity supplied. The second effect will be the emergence of a black market, where the good will be traded illegally.

Consider the following diagram:

Initially, when there was no restriction, the equilibrium occurred at point E, where the equilibrium price is OP* and the equilibrium quantity is OQ*. Now, when the price ceiling came into effect, the market price was fixed at OPc. Here the quantity demanded becomes OQd and the quantity supplied is just OQs. Thus there emerges an excess demand amounting to AB. When this law is removed, the market equilibrium is restored. The new market price becomes OP* and the equilibrium quantity is OQ*.

b)
Consider the following diagram:

Initially, when there was no restriction, the equilibrium occurred at point E, where the equilibrium price is OP* and the equilibrium quantity is OQ*. Now, when the price ceiling came into effect, the market price was fixed at OPc. Here the quantity demanded becomes OQd and the quantity supplied is just OQs. Thus there emerges an excess demand amounting to AB.

3. Pollution is considered by most a negative externality. Some economists would like to see the costs of these burdens incorporated into the price of goods that we buy. For instance, since coal fire power plants increase emissions that could potentially lead to climate change, these economists believe that the price we pay for electricity is not adequately high enough. Draw a completely labeled graph and illustrate on the graph how much higher electricity prices would be if the full costs of electricity production were taken into account. You do not need to provide actual numbers; rather, show on the price axis where the price would be before the externality is considered and the price after the externality is included. What problems might exist in determining this new, externality based, price?

An externality is a cost or a benefit which is imposed upon a third party by the production or consumption of a good. Externalities arise whenever the actions of one economic agent make another economic agent worse off or better off, yet the first agent neither bears the costs nor receives the benefits of doing so. Externalities are also known as spillover effects. Pollution...
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