If you know how to do please contact with me. Micro Theory HW #5 Instructor: Mat

Question

If you know how to do please contact with me.

Micro Theory HW #5 Instructor: Matthew Hendricks Office CH 224 Due - at the final exam Define a competitive market equilibrium in the product market What is the definition of a Pareto efficient outcome? What does the first welfare theorem say about competitive market outcomes? If an outcome is Pareto efficient, does that necessarily mean that it is socially optimal? Describe why a Pareto efficient outcome may not be a "good" outcome for society How does the 2nd welfare theorem address the issue of inequality in market outcomes? Describe 3 situations that may exist in the real world that could lead to "market failure" (a situation that causes a market equilibrium to not be Pareto efficient) 1. 2. 3. 4. 5. 6. Suppose the inverse labor supply curve is: w SL. The inverse labor demand curve is: w-100-20L 7. Solve for the competitive market equilibrium (CME) wage and employment level. 8. Is there any unemployment at the CME? 9. If the government sets a minimum wage at $40, what is the resulting quantity of labor supplied and demanded? 10. What happened to the employment level after the government imposed a minimum wage in this model? 11. Under what conditions could a minimum wage actually increase employment? 12. Under the minimum wage policy, how many unemployed workers are there? For the following questions refer back to the CME. The minimum wage policy does not exist. 13. If the government imposes a $25 income tax (a per-unit tax on labor), what is the new employment level, wage workers receive (the tax inclusive wage), and wage firms pay? 14. How much tax do firms pay? 15. How much tax do workers pay? 16. Who pays more tax and why? 17. How much revenue could the government have raised in a head tax that has the same burden on workers and firms? 18. Why don't governments typically use head taxes? For the following questions refer back to the CME. The tax and minimum wage policies do not exist. 19. What is the wage and employment level that would exist under monopsony? 20. How does this wage and employment level compare to the CME? 22. Describe one policy that the govenment could use to fix this. Suppose now there is a negative production externality that costs society $50 per unit of labor hired. 23. What is the social marginal benefit curve now, and why is it not the same as the labor demand curve? 24. What is the socially optimal level of employment? 25. What is the dead-weight loss associated with the CME? 26. What is the dead-weight loss associated with the monopsony? 27. Is the monopsony outcome better or worse than the CME in this case? 28. How can the government fix the extermality problem so that we get the socialy optimal level of employment in this market?

Explanation / Answer

7) equilibrium is where labor supplied=labor demand

5L=100-20L

25L=100 Thus L=4 and wage=20

8) no unemployment when wage =20

9)when wage=40, labor demand=100-40/20=3 and labor supplied=40/5=8

10) employment decreases when wage increases from 20 to 40.

11)minimum wage can never increase employment because minimum wage is not a binding and thus employment is maximised when minimum wage=equilibrium wage

12)there are 5unemployed worker under minimum wage policy

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