The government decides to regulate the labor market. Assume the demand for labor is inelastic, while the supply of labor is elastic. a) On a graph, show the equilibrium wage and the employment level. Make sure you label the axes and the curves. b) The government decides to introduce minimum wage: now it’s illegal to offer wage below the minimum wage level. On a graph, show how the market will be affected if the minimum wage is set to be above the equilibrium wage. What wage will be offered on the market? What will happen to the employment level? What negative consequences will this government intervention have? c) Forget about part (b). The government decides to introduce a tax on every worker. On a new graph, without showing any shifts of the curves, show the new wage you’d observe the firms to pay and the wage you’d observe households to receive. Comment on the tax incidence: who will bear most of the burden of the tax?
The government decides to regulate the labor market. Assume the demand for labor is inelastic,
while the supply of labor is elastic.
a) On a graph, show the equilibrium wage and the employment level. Make sure you label
the axes and the
b) The government decides to introduce minimum wage: now it’s illegal to offer wage
below the minimum wage level. On a graph, show how the market will be affected if the
minimum wage is set to be above the equilibrium wage. What wage will be offered on the
market? What will happen to the employment level? What negative consequences will
this government intervention have?
c) Forget about part (b). The government decides to introduce a tax on every worker. On a
new graph, without showing any shifts of the curves, show the new wage you’d observe
the firms to pay and the wage you’d observe households to receive. Comment on the tax
incidence: who will bear most of the burden of the tax?
Problem 3:
On the market for cherries, supply is inelastic, while demand is elastic. You know that suppliers
are not ready to supply any cherries when the price is below $1.5 per pound.
a) On a graph, show the
the axes and the curves. Then, show the consumer surplus and the producer surplus.
b) Strawberries and cherries are substitutes. The price of strawberries increased. On a graph,
show what will happen on the market for cherries. Show the change in the consumer
surplus. Show the change in the producer surplus.
c) Forget about part (b). There are issues with the supply chain: transportation companies
raise the fees they charge to deliver cherries from the farms to the supermarkets. On a
graph, show what will happen on the market for cherries. Show the change in the
consumer surplus. Show the change in the producer surplus
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