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Chapter 9: Labor demand (page 327)
What is the difference between demand for labor and supply of labor?
One refers to hours the other to the amount of workers.
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About 100 million pounds of jelly beans are consumed in the United States each year, and the price has been about 50 cents per pound. However, jelly bean producers feel that their incomes are too low and have convinced the government that price supports are in order. The government will therefore buy up as many jelly beans as necessary to keep the price at \(1 per pound. However, government economists are worried about the impact of this program because they have no estimates of the elasticities of jelly bean demand or supply.
a. Could this program cost the government more than \)50 million per year? Under what conditions?Could it cost less than \(50 million per year? Under what conditions? Illustrate with a diagram.
b. Could this program cost consumers (in terms of lost consumer surplus) more than \)50 million per year? Under what conditions? Could it cost consumers less than $50 million per year? Under what conditions? Again, use a diagram to illustrate.
In 2011, Americans smoked 16 billion packs of cigarettes. They paid an average retail price of \(5.00 per pack.
a. Given that the elasticity of supply is 0.5 and the elasticity of demand is -0.4, derive linear demand and supply curves for cigarettes.
b. Cigarettes are subject to a federal tax, which was about \)1.00 per pack in 2011. What does this tax do to the market-clearing price and quantity?
c. How much of the federal tax will consumers pay? What part will producers pay?
From time to time, Congress has raised the minimum wage. Some people suggested that a government subsidy could help employers finance the higher wage. This exercise examines the economics of minimum wage and wage subsidies. Suppose the supply of low-skilled labor is given by
LS= 10w
where, LS is the quantity of low-skilled labor (in millions of persons employed each year), and w is the wage rate(in dollars per hour). The demand for labor is given by
LD= 80 - 10w
a. What will be the free-market wage rate and employment level? Suppose the government sets a minimum wage of \(5 per hour. How many people would then be employed?
b. Suppose that instead of a minimum wage, the government pays a subsidy of \)1 per hour for each employee. What will the total level of employment be now? What will the equilibrium wage rate be?
Japanese rice producers have extremely high production costs, due in part to the high opportunity cost of land and to their inability to take advantage of economies of large-scale production. Analyze two policies intended to maintain Japanese rice production:
(1) a per-pound subsidy to farmers for each pound of rice produced, or
(2) a per-pound tariff on imported rice.
Illustrate with supply-and-demand diagrams the equilibrium price and quantity, domestic rice production, government revenue or deficit, and deadweight loss from each policy. Which policy is the Japanese government likely to prefer? Which policy is Japanese farmers likely to prefer?
In Exercise 4 in Chapter 2 (page 84), we examined a vegetable fiber traded in a competitive world market and imported into the United States at a world price of \(9 per pound. U.S. domestic supply and demand for various price levels are shown in the following table.
Price | U.S. Supply (Million Pounds) | U.S. Demand (Million Pounds) |
3 | 2 | 34 |
6 | 4 | 28 |
9 | 6 | 22 |
12 | 8 | 16 |
15 | 10 | 10 |
18 | 12 | 4 |
Answer the following questions about the U.S. market:
a. Confirm that the demand curve is given by QD = 40 - 2P, and that the supply curve is given by QS = 2/3P.
b. Confirm that if there were no restrictions on trade, the United States would import 16 million pounds.
c. If the United States imposes a tariff of \)3 per pound, what will be the U.S. price and level of imports? How much revenue will the government earn from the tariff? How large is the deadweight loss?
d. If the United States has no tariff but imposes an import quota of 8 million pounds, what will be the U.S. domestic price? What is the cost of this quota for U.S. consumers of fiber? What is the gain for U.S. producers?
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