A recent study found that the demand and supply schedules for Frisbees are as follows Price per Frisbee Quantity Demanded millions Quantity Supplied Econ 1 TA session Chapter 6 Question 3 11 10 9 8 7 6 Week 5 15 12 9 6 3 1 1 What are the equilibrium price and quantity of Frisbees 2 Frisbee manufacturers persuade the government that Frisbee production improves sci entists understanding of aerodynamics and thus is important for national security A concerned Congress votes to impose a price floor 2 above the equilibrium price What is the new market price How many Frisbees are sold 3 Irate college students march on Washington and demand a reduction in the price of Fris bees An even more concerned Congress votes to repeal the price floor and impose a price ceiling 1 below the former price floor What is the new market price How many Frisbees are sold SOLUTION 1 The equilibrium price of Frisbees is 8 and the equilibrium quantity is six million Frisbees 2 With a price floor of 10 the new market price is 10 because the price floor is binding At that price only two million Frisbees are sold because that is the quantity demanded 3 If there s a price ceiling of 9 it has no effect because the market equilibrium price is 8 which is below the ceiling So the market price is 8 and the quantity sold is six million Frisbees 1 2 4 6 8 10 1 Econ 1 TA session Question 8 Week 5 A case study in this chapter discusses the federal minimum wage law 1 Suppose the minimum wage is above the equilibrium wage in the market for unskilled labor Using a supply and demand diagram of the market for unskilled labor show the market wage the number of workers who are employed and the number of workers who are unemployed Also show the total wage payments to unskilled workers 2 Now suppose the secretary of labor proposes an increase in the minimum wage What effect would this increase have on employment Does the change in employment depend on the elasticity of demand the elasticity of supply both elasticities or neither 3 What effect would this increase in the minimum wage have on unemployment Does the change in unemployment depend on the elasticity of demand the elasticity of supply both elasticities or neither 4 If the demand for unskilled labor were inelastic would the proposed increase in the mini mum wage raise or lower total wage payments to unskilled workers Would your answer change if the demand for unskilled labor were elastic SOLUTION 1 The figure below shows the effects of the minimum wage In the absence of the minimum wage the market wage would be w1 and Q1 workers would be employed With the minimum wage wm imposed above w1 the market wage is wm the number of employed workers is Q2 and the number of workers who are unemployed is Q3 Q2 Total wage payments to workers are shown as the area of rectangle ABCD which equals wm times Q2 2 Econ 1 TA session Week 5 2 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 3 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 4 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 Question 10 A market is described by the following supply and demand curves QS 2P QD 300 P 3 Econ 1 TA session Week 5 1 Solve for the equilibrium price and quantity 2 If the government imposes a price ceiling of 90 does a shortage or surplus or neither develop What are the price quantity supplied quantity demanded and size of the 3 If the government imposes a price floor of 90 does a shortage or surplus or neither develop What are the price quantity supplied quantity demanded and size of the 4 Instead of a price control the government levies a tax on producers of 30 As a result shortage or surplus shortage or surplus the new supply curve is Does a shortage or surplus or neither develop What are the price quantity supplied quantity demanded and size of the shortage or surplus SOLUTION quantity demanded 1 Solve for the equilibrium price and quantity by setting the quantity supplied equal to the QS 2 P 30 2P 300 P 3P 300 P 100 When the equilibrium price is 100 the equilibrium quantity is 2 100 200 2 If the government imposes a price ceiling of 90 a shortage develops The ceiling is below the equilibrium price so it is a binding price ceiling At the ceiling price of 90 the quantity supplied is 2 90 180 units and the quantity demanded is 300 90 210 units Consumers want to buy 30 more units than producers want to sell at the price ceiling 3 If the government imposes a price floor of 90 neither a shortage nor a surplus develops The floor is lower than the equilibrium price so it is not a binding price floor With a price floor of 90 the equilibrium price of 100 will prevail The quantity supplied and demanded will be the equilibrium quantity of 200 units 4 Econ 1 TA session Week 5 4 If the government levies a 30 tax on producers neither a shortage nor a surplus develops but the quantity exchanged is smaller than without the tax Using the new supply curve 2 P 30 300 P 2P 60 300 P 3P 360 P 120 Q 300 120 180 The price buyers pay is 120 Producers retain 90 per unit after submitting the 30 tax The quantity demanded and supplied is 180 units 5