Econ 213 Problem Set 2 Name P
Econ 213problem Set 2name P
Econ 213 Problem Set 2 requires analyzing market equilibrium, effects of price controls, externalities, and consumer and producer surplus calculations based on specified data. The assignment involves drawing supply and demand graphs, explaining market outcomes, and performing surplus calculations under different scenarios, including changes in market prices.
Paper For Above instruction
This paper addresses the multifaceted issues presented in the Econ 213 Problem Set 2, emphasizing foundational concepts in microeconomics such as market equilibrium, government intervention, externalities, and surplus analysis. It systematically explores each question with clear economic reasoning, supported by graphical illustrations where appropriate, and concludes with a comprehensive discussion on how externalities influence market prices and how consumer and producer surpluses respond to changing market conditions.
1. Market for Internet Security Professionals
The initial scenario involves analyzing a labor market for Internet security professionals, with given wage levels and corresponding quantities demanded and supplied. The goal is to determine the equilibrium wage and assess the effects of a government-imposed wage ceiling.
a) Equilibrium Wage
The table presented offers data points for wages and quantities demanded and supplied:
| Wage | Quantity Demanded | Quantity Supplied |
|---------|-------------------------|-----------------------|
| $50,000 | (not specified) | (not specified) |
| $60,000 | (not specified) | (not specified) |
| $70,000 | (not specified) | (not specified) |
| $80,000 | (not specified) | (not specified) |
| $90,000 | (not specified) | (not specified) |
(Note: The actual quantities are missing from the prompt. Let's assume hypothetical data aligning with typical market behavior. For demonstration: at $70,000, demand and supply equal — for instance, demand is 20,000 and supply is 20,000 units, indicating equilibrium.)
Answer: The equilibrium wage occurs where the quantity demanded equals the quantity supplied. Assuming the demand and supply intersect at a wage of $70,000, that is the equilibrium wage.
b) Impact of Wage Control at $75,000
If the government sets a wage ceiling at $75,000, which is below the equilibrium wage, this creates a binding constraint.
Will this increase the number of individuals entering the labor market?
No. A ceiling set below the equilibrium wage discourages higher wages, reducing the incentive for workers to supply their labor because the wage is lower than what would naturally be offered. Consequently, fewer individuals are willing to work at the capped wage, decreasing the labor supply. Thus, demand might not increase because employers are constrained by the lower wage, and the number of entrants does not increase.
Answer: No, a wage ceiling below the equilibrium will not increase the number of people entering the market; instead, it reduces the attractiveness of labor entry, leading to a potential shortage of labor.
Will this increase the number of people hired?
No. Since the wage is artificially capped below the equilibrium level, the quantity of labor demanded by firms at this wage decreases. Employers will hire fewer workers because the cost of employment is artificially suppressed, reducing total hires.
Answer: No, the wage ceiling will not increase the number of hires; it could decrease them, causing a labor shortage.
2. Impact of Price Ceiling on Graham Crackers
Policymakers are considering imposing a price ceiling on graham crackers to benefit consumers (e.g., preschoolers). This involves analyzing a supply and demand graph to understand equilibrium and market outcomes.
a) Supply and Demand Graph
The graph plots quantity on the x-axis and price on the y-axis. The demand curve slopes downward, indicating higher quantities demanded at lower prices, while the supply curve slopes upward.
Impose a horizontal line at the price ceiling level, which is below the equilibrium price, creating a binding constraint:
```plaintext
Price
|
| S
| /
| /
|-------/------------------ supply
| /
| /
| /
| /
| /
| / D
| / /
|/_____________/__________________ Quantity
Qd Qs
```
Label the price ceiling line, equilibrium point where demand and supply intersect, the quantity demanded Qd, and quantity supplied Qs.
b) Market Outcomes
A binding price ceiling set below equilibrium reduces the market price. This leads to an excess quantity demanded (Qd) exceeding quantity supplied (Qs), resulting in a shortage.
Result: There will be a shortage of graham crackers because at the capped price, consumers desire more than producers are willing to supply. This imbalance causes rationing issues and black markets in some cases.
Answer: A price ceiling below equilibrium causes a shortage because demand exceeds supply at that artificially low price.
3. Externalities and the True Cost of Electricity
Pollution from coal-fired power plants exemplifies a negative externality, influencing the social cost of electricity.
a) Graphical Illustration
On a supply and demand graph:
- The original supply curve (S) reflects producers' private costs.
- The demand curve (D) reflects consumers' willingness to pay.
- The social cost curve (S') includes external costs (pollution costs), shifting the supply curve leftward.
Before external costs are considered:
```plaintext
Price
|
| S
| /
| /
|----/-------------- original supply
| /
| /
| / D
| /
|/___________________ Quantity
```
After incorporating external costs, the new supply curve (S') is to the left, indicating higher costs:
```plaintext
Price
|
| S'
| /
| /
|----/-------------- social supply (higher costs)
| /
| /
| / D
| /
|/___________________ Quantity
```
New equilibrium:
- Price increases from the original to a higher level (from P to P1).
- The new quantity decreases, reflecting higher costs.
Answer: Accounting for external costs would push the supply curve leftward, resulting in higher electricity prices (from P to P1), reflecting the full social cost.
b) Challenges in Determining the Externality-Adjusted Price
Several problems affect accurately calculating this new price:
- Measuring external costs like environmental damage is complex and often uncertain.
- External costs vary temporally and geographically.
- Valuing non-market impacts (e.g., health effects) involves subjective judgments.
- Political resistance and lobbying may influence the setting of externality-inclusive prices.
Answer: Difficulties include quantifying external costs, variability in environmental impacts, and political pressures, making precise price determination challenging.
4. Consumer and Producer Surplus Calculations
Calculated at market prices of $5 and $2 based on individuals' willingness to pay and marginal costs of production.
Consumer Surplus at $5
Consumer surplus (CS) = Sum of individual willingness to pay minus actual price, for those whose WTP exceeds market price:
| Individual | WTP | Surplus (WTP - $5) |
|--------------|-------|---------------------|
| Scott | $10 | $5 |
| Dennis | $4 | $0 (WTP
| Greg | $8 | $3 |
| Dave | $7 | $2 |
| Mike | $5 | $0 |
Total CS:
- Scott: $5
- Greg: $3
- Dave: $2
Sum: $10
Producer Surplus at $5
Producers with marginal costs less than market price gain surplus:
| Producer | Marginal Cost | Surplus (P - MC) |
|------------|--------------|------------------|
| Gene | $6 | $0 (MC > P) |
| Brandon | $3 | $2 |
| Matt | $2 | $3 |
| Cooper | $11 | $0 (MC > P) |
| Jed | $5 | $0 (MC = P) |
Total producer surplus:
- Brandon: $2
- Matt: $3
Sum: $5
Changes if Price Falls to $2
Consumer Surplus:
- Scott: $8
- Dennis: $2
- Greg: $6
- Dave: $5
- Mike: $0 (WTP = $5; surplus = $-3, so not considered)
Total:
- Scott: $8
- Greg: $6
- Dave: $5
Sum: $19
Producer Surplus:
- All producers with MC below $2:
Gene ($6) and Jed ($5): since MC > $2, no surplus
- Brandon ($3): MC > $2, no surplus
- Matt ($2): MC = $2, surplus = $0
- Cooper ($11): no surplus
Total producer surplus: $0
Summary:
Lowering the price from $5 to $2 increases consumer surplus but reduces or eliminates producer surplus, demonstrating trade-offs in market pricing and welfare.
Conclusion
This comprehensive analysis underscores critical microeconomic principles, illustrating how wages, price controls, externalities, and market surpluses interact within the economy. Proper understanding of these concepts aids policymakers in designing more effective interventions that balance market efficiency and social welfare. Recognizing the complexities inherent in external cost estimations and market behavior is vital for making informed economic decisions that promote sustainable and equitable growth.
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