1. Elasticity Assume hamburger has a negative income elasticity. Given this assu
ID: 3051561 • Letter: 1
Question
1. Elasticity Assume hamburger has a negative income elasticity. Given this assumption, if income falls, what do you expect to happen to the price of hamburger and the quantity of hamburger sold? Why? Explain in words and graphically. 2. Consumer Surplus and Producer Surplus Explain in words and graphically how consumer surplus, producer surplus and total surplus change when the minimum wage is removed. Assume the minimum wage is above the free market price. In your explanation please interpret the components of the changes in consumer surplus, producer surplus and total surplus; i.e. what each component represents. For additional points, what happens if the minimum wage is set below the free market price? 3. Public Policy Analysis The Washington, D.C., police bought more than 6,000 guns, no questions asked, in gun buyback programs in 1999 and 2000. Millions of dollars have been spent in similar programs in many cities including NYC. The theory of gun buybacks is that: buybacks reduce guns in circulation and fewer guns in circulation reduce crime. Do gun buyback programs make good policies? (Hints: What condition of guns are likely to be offered at buybacks? What might be the elasticity of S? What are the S and D curves initially and with buyback programs? What happens to P and Q initially and with buyback programs?) 4. Unskilled Labor Market Consider the market for unskilled labor of undocumented workers in the United States. Ignore skilled or legal workers for this problem. A.Putting the problem in a market framework A. Please suggest several ways in units (e.g. $/hr) you might measure the price of such labor. Pick one measure and label the units for the Y-axis. B. Please suggest several ways in units (e.g. hrs) you might measure the quantity of such labor? Pick one measure and label the units for the X-axis. C. Who are the consumers of unskilled labor? Give examples. D. Who are the producers of unskilled labor? Give examples. B. In the short-run (say a few months), how price elastic do you think the demand for unskilled labor of undocumented workers is? Explain why. C. Suppose that suddenly (during one month) draconian measures against undocumented workers were adopted. For example, these measures might include all of the following: extensive investigations at many work places, jail terms of months or years for any undocumented workers caught, and jail terms and extensive fines for anyone employing undocumented workers. a. Illustrate the impact in a supply and demand diagram, showing the market before and right after the draconian measures. Explain in words. Make sure to show what happens to prices and quantities. b. In the same diagram, show what happens to consumer surplus and producer surplus. Explain in words what happens to each of these and why. D. How price elastic do you think demand for unskilled labor of undocumented workers is in the long-run of say 10 years? Explain why. E. How would the results of 3A and 3B be different if the “after” period under consideration is a “long-run” of 10 years? Specifically, illustrate the impact of the draconian measures in a supply and demand diagram, including consumer and producer surplus changes. Show before the draconian changes and 10 years after they have been implemented but do not show any periods in between. F. Explain why the impact of the draconian measures on the changes in consumer and producer surplus are different in the long run and in the short run.
Explanation / Answer
1.
The demand for good is an inverse relationship between price and quantity. The equation of the demand curve gives the quantity demanded as a function of price. The graphical relationship between price and quantity demanded is depicted by the demand curve. Any point on the demand curve shows the quantity consumer demands for any particular price. The inverse demand curve is represents price as a function of quantity.
The income elasticity of demand is responsiveness of demand to the income of the consumer. It measures the percentage change in quantity demanded due to percentage change in income.
For an inferior good, change in income and quantity demanded moves in opposite direction. Therefore, the income elasticity of an inferior good, will be negative. Therefore, as income falls demand for burger will rise. This will increase the price and quantity demanded of the hamburger given supply.
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