Chapter 4 practice problems Flashcards
State the two major jobs that price performs.
Price acts as a rationing device and Price acts as a transmitter of information.
Prove graphically that a minimum wage (set above the equilibrium wage) reduces employment.
In the figure below, at the equilibrium wage WE, N1 number of workers are demanded and supplied. When the minimum wage is set above the equilibrium wage at WM, the number of workers supplied increases to N3; however, the number of workers demanded falls to N2. So, at a minimum wage set above the equilibrium wage, employment falls.
Think of ticket scalpers at a concert or a baseball game. Might they exist because the tickets to these events were originally sold for less than the equilibrium price? Why or why not? In what way is a ticket scalper like and unlike your retail grocer, who buys food from a wholesaler and then sells it to you?
Ticket scalpers exist because there is disequilibrium in the market for tickets (a shortage of tickets) due to the fact that the tickets were originally sold for less than the equilibrium price. If the tickets were originally sold at the equilibrium price then there would be no arbitrage opportunities for ticket scalpers to exploit. A ticket scalper is like a retail grocer because both buy at one price and resell at a higher price. Many people recognize that the retail grocer is compensated for the value they add to the transaction (one-stop shopping for many items, for instance), but don’t see any value added by the ticket scalper. Many people believe that if the ticket scalper had not bought the ticket, it would have been available for the ultimate consumer to buy. Others say that the scalper provides the service of waiting in line, but in today’s computerized selling systems, the wait time is negligible.
Define the following terms
Price Ceiling:
Price Floor:
a) A price ceiling is a government-mandated maximum price above which legal trades cannot be made.
b) A price floor is a government-mandated minimum price above which legal trades cannot be made.
List the undesirable effects of price ceilings.
Price ceilings lead to persistent shortages, fewer exchanges, nonprice-rationing, illegal market transactions, and tie-in sales.
List the undesirable effects of price floors.
Price floors lead to persistent surpluses and fewer exchanges.
