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Economics Questions and Analysis

## Question 1: Labor Markets

1.Suppose there are two labor markets in a perfectly competitive industry; one regulated by the minimum wage and one not (not all firms have to follow a federally mandated minimum wage). Draw two graphs in equilibrium without regulation. If a binding minimum wage in placed in one market, show what happens to the quantity traded in that market and the wage and quantity in the unregulated market?

2.Discuss the relevance of the First and Second Fundamental Theorems of Welfare Economics to Bernie Sanders proposals to change tax policy to benefit the middle class.

3.Examine Figure 15.6 in the text and assume Friday and Robinson have endowment W.

a.If they have identical preferences are they likely to trade from point W?

b.Explain whether the move from endowment W to B is Pareto improving.

c.Imagine a point C on the contract curve half way between points A and B. Explain whether a move from endowment B to C would change efficiency, equity or both.

d.An Edgeworth box is drawn with respect to two people and two goods. Discuss how the existence of general equilibrium market prices and competitive exchange make it possible to conceive of an Edgeworth box for many people and goods. Write and explain an equation that describes this equilibrium? (Hint: The equations below Figure 15.6 are part of the equation, but do not include market prices as are implied in the question. Think of the equation as an expansion of the “use-the-graphs” equation we used in Consumer Theory.)

4.Suppose the demand for new automobiles is given by QDA = 20 – 0.7PA – PG, where QA and PA are the quantity (in millions) and price (in thousands of dollars) of new automobiles and PG is the price of gas (dollars per gallon). The supply of automobiles is QSA = 0.3PA and the demand and supply of gas is QDG = 3 – PG and QSG = PG.

a.Find the equilibrium price and quantity of automobiles and gas.

b.Find the new equilibrium price and quantity of automobiles and gas if there is a \$0.50 per gallon tax on gasoline.

c.Discuss why the prices and quantities of automobiles and gas change and which change can be found using partial equilibrium analysis and which requires general equilibrium analysis.

5.Green likes to speed and has an expected cost of speeding of \$21.25.

a.A ticket for going 20 miles per hour over the speed limit is \$425. What is Green’s perceived probability of getting caught at this speed if Green is risk neutral? (Hint, consider the expected cost formula EC = PT*\$ticket + PNT*\$no ticket, which is a version of the expected value formula.)

b.What is Green’s expected wealth if his initial wealth is \$2,025 and he speeds? (Expected, not actual wealth.)

c.Suppose Green has a utility function U = w1/2, where w is wealth, which is currently \$2,025. What is the decrease in Green’s utility if he gets a speeding ticket?

d.What is Green’s expected utility of speeding? Use the probability you found in part a.

e.What is the certainty equivalent of wealth for Green’s speeding activity?

f.What is the maximum Green would be willing to pay for speeding “insurance”? That is, how much would Green pay for insurance that would pay for his speeding tickets if he were caught speeding?