3872 WordsApr 17, 201516 Pages

Chapter-6: Problems & Applications: 2, 4, 8
QUESTION 2
The government has decided that the free-market price of cheese is too low.
a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?
b. Producers of cheese complain that the price floor has reduced their total revenue. Is this possible? Explain.
c. In response to cheese producers’ complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?
Answer
a. The imposition of a binding price floor*…show more content…*

Total wage payments to workers are shown as the area of rectangle ABCD, which equals wm times Q2.
b) An increase in the minimum wage would decrease employment. The size of the effect on employment depends only on the elasticity of demand. The elasticity of supply does not matter, because there is a surplus of labor.
c) The increase in the minimum wage would increase unemployment. The size of the rise in unemployment depends on both the elasticities of supply and demand. The elasticity of demand determines the change in the quantity of labor demanded, the elasticity of supply determines the change in the quantity of labor supplied, and the difference between the quantities supplied and demanded of labor is the amount of unemployment.
d) If the demand for unskilled labor were inelastic, the rise in the minimum wage would increase total wage payments to unskilled labor. With inelastic demand, the percentage decline in employment would be lower than the percentage increase in the wage, so total wage payments increase. However, if the demand for unskilled labor were elastic, total wage payments would decline, because then the percentage decline in employment would exceed the percentage increase in the wage.
Chapter 7, Problems & Applications: 1, 4, 5, 6
QUESTION 1
Melissa buys an iPhone for $120 and gets consumer surplus of $80.
a) What is her willingness to pay?
b) If she had bought the iPhone on sale for $90, what

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