#### Transcript Ch7

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Government
Actions in Markets
7
CHECKPOINTS
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Checkpoint 7.1
Checkpoint 7.2
Checkpoint 7.3
Problem 1
Problem 1
Problem 1
Problem 2
Problem 2
Problem 2
Problem 3
In the News
Clicker
version
Problem 3
Problem 4
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version
Problem 3
Problem 4
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version
CHECKPOINT 7.1
Practice Problem 1
The figure shows the rental
market for apartments in
Corsicana, Texas.
What is the rent in this city and
how many apartments are
rented?
If the city government imposes
a rent ceiling of \$900 a month,
what is the rent, and how many
apartments are rented?
CHECKPOINT 7.1
Solution
A rent ceiling of \$900 a month
is above the equilibrium rent,
so the outcome is the market
equilibrium rent of \$800 a
month with 3,000 apartments
rented.
CHECKPOINT 7.1
Practice Problem 2
The figure shows the rental market
for apartments in Corsicana,
Texas.
If the city government imposes a
rent ceiling of \$600 a month, what
is the rent, and how many
apartments are rented?
If a black market develops, how
high could the black market rent
CHECKPOINT 7.1
Solution
With the rent ceiling at \$600
a month, the number of
apartments rented is 1,000
and the rent is \$600 a
month.
In a black market, some
people are willing to rent an
apartment for more than the
rent ceiling.
CHECKPOINT 7.1
The highest rent that someone
would offer is \$1200 a month.
This rent equals someone’s
willingness to pay for the 1,000th
apartment.
CHECKPOINT 7.1
Practice Problem 3
The figure shows the rental
market for apartments in
Corsicana, Texas.
With a strictly enforced rent
ceiling of \$600 a month, is the
housing market efficient?
Is the housing market fair?
Explain why or why not.
CHECKPOINT 7.1
Solution
The housing market is not
efficient.
With 1,000 apartments rented,
marginal benefit exceeds
loss arises.
CHECKPOINT 7.1
area of the gray triangle:
(1,200 – 600) x (3,000 – 1,000).
CHECKPOINT 7.1
The rent ceiling makes the
allocation of housing less fair in
both views of fairness:
1. It blocks voluntary
transactions,
2. It does not provide more
housing to those in most
need.
CHECKPOINT 7.1
Study Plan Problem
With a strictly enforced rent ceiling of \$600 a
month, the housing market is _______.
A. efficient because a rent ceiling gives
housing
B. efficient because the marginal cost of
the last apartment rented is greater
than its marginal benefit
C. inefficient because the marginal cost of
the last apartment rented is greater
than its marginal benefit
D. inefficient because the marginal benefit
from the last apartment rented is
greater than its marginal cost.
The figure shows the rental
market for apartments.
CHECKPOINT 7.1
In the News
Rising oil prices worry U.S. finance chiefs
Tupperware’s CFO says rising oil prices would cause the
company to pay \$15 million more for resin, which is based
on oil, than it did a year ago. Resin prices are closely tied
to the price of oil, which peaked at \$114 a barrel in April.
Source: The Wall Street Journal, April 27, 2011
If the government puts a price cap on resin at today’s price
(\$100 a barrel), explain why a shortage will occur.
Which allocation method is mostly likely to be used to
distribute resin?
CHECKPOINT 7.1
Solution
Resin is made from oil, so a rise in the price of oil increases
the cost of making resin and decreases the supply of resin.
The equilibrium price of resin will rise.
A price cap at \$100 a barrel will create a shortage because
the price cap is below the market equilibrium price.
Resin will be allocated by the first-come, first-served
method unless the government rations resin, in which case
it will be allocated by command.
CHECKPOINT 7.2
Practice Problem 1
The figure shows the market for
tomato pickers in southern
California.
What is the equilibrium wage rate
and what is the equilibrium
quantity of tomato pickers
employed?
If California introduces a minimum
wage of \$4 an hour, how many
tomato pickers are employed, and
how many are unemployed?
CHECKPOINT 7.2
Solution
The equilibrium wage rate is \$6
an hour, and 4,000 pickers are
employed.
The minimum wage of \$4 an
hour is below the equilibrium
wage rate, so 4,000 tomato
pickers are employed and none
are unemployed.
CHECKPOINT 7.2
Practice Problem 2
The figure shows the market for
tomato pickers in southern California.
If California introduces a minimum
wage of \$8 an hour, how many
tomato pickers are employed and
how many are unemployed?
What is the lowest wage that some
workers might be able to earn if a
black market developed?
CHECKPOINT 7.2
Solution
The minimum wage of \$8 an
hour is above the equilibrium
wage rate:
3,000 pickers are employed
(from the demand curve)
5,000 people would like to
work as pickers for \$8 an hour
(from the supply curve),
2,000 pickers are unemployed.
CHECKPOINT 7.2
If a black market developed,
the lowest wage that some
workers might be able to earn
would be \$4 an hour.
CHECKPOINT 7.2
Practice Problem 3
The figure shows the market
for tomato pickers in southern
California.
Is the minimum wage of \$8 an
hour efficient?
Who gains and who loses from
the minimum wage of \$8 and
hour?
Is the minimum wage of \$8 an
hour fair?
CHECKPOINT 7.2
Solution
The minimum wage of \$8 an hour is
not efficient because the marginal
benefit to growers (on the demand
curve) exceeds the marginal cost to
pickers (on the supply curve).
The minimum wage creates a
unemployed pickers search for jobs.
CHECKPOINT 7.2
The tomato pickers who find work
at \$8 an hour gain.
The tomato growers and the
unemployed pickers lose.
The minimum wage is unfair on
both the fair rules and fair results
views of fairness.
CHECKPOINT 7.2
Study Plan Problem
The figure shows the market for
tomato pickers in southern
California. If California introduces a
minimum wage of \$8.00 an hour,
the minimum wage is __________.
A. inefficient and not fair
B. efficient and fair only if the workers
can increase the number of hours
they work
C. inefficient but fair
D. efficient and fair
E. efficient but not fair
CHECKPOINT 7.2
The figure shows the market for
tomato pickers in southern
California. If California introduces a
minimum wage of \$8.00 an hour,
________gain and_______ lose.
A. unemployed pickers and tomato
growers; employed pickers
B. unemployed pickers; tomato growers
C. tomato growers; tomato growers who
find work
D. employed pickers; tomato growers
and unemployed pickers
E. all pickers; tomato growers
CHECKPOINT 7.2
In the News
Hong Kong introduces a minimum wage
Hong Kong’s first minimum wage is set at \$HK28 an
hour—\$HK5 less than labor unions wanted, but \$HK5
people will be affected by the new wage..
Source: The Economist, January 11, 2011
What will be the effects of the minimum wage if the
employers’ offer is equal to the equilibrium wage?
What will be the effects of the minimum wage if the labor
unions’ demand is equal to the equilibrium wage?
CHECKPOINT 7.2
Solution
If the employers’ offer of \$HK23 an hour is the equilibrium
wage rate, then the minimum wage exceeds the
equilibrium wage and some of the 315,000 workers will
become unemployed.
If the union’s demand of \$HK33 an hour is the equilibrium
wage rate, then the minimum wage is below the
equilibrium wage and the minimum wage has no effect on
the quantity of labor employed.
CHECKPOINT 7.3
Practice Problem 1
The figure shows the market for
tomatoes.
What are the equilibrium price and
quantity of tomatoes?
Is the market for tomatoes
efficient?
CHECKPOINT 7.3
Solution
The equilibrium price is \$6 per
pound, and the equilibrium
quantity is 2 billion pounds a
year.
The market for tomatoes is
efficient—marginal benefit
equals marginal cost and total
surplus is maximized.
CHECKPOINT 7.3
Practice Problem 2
The figure shows the market for
tomatoes.
The government introduces a
price support for tomatoes at \$8
per pound.
What is the quantity of tomatoes
produced, the quantity
demanded, and the subsidy
CHECKPOINT 7.3
Solution
At a support price of \$8 per
pound, 3 billion pounds are
produced and 1 billion pounds
are demanded, so there is a
surplus of 2 billion pounds.
The subsidy is \$8 per pound on
2 billion pounds, which is \$16
billion.
CHECKPOINT 7.3
Practice Problem 3
The figure shows the market
for tomatoes.
With the price support at \$8
per pound, is the market for
tomatoes efficient?
Who gains and who loses from
the price support?
Could the price support be
regarded as being fair?
CHECKPOINT 7.3
Solution
The market is not efficient because
at the quantity produced, the
marginal benefit (on the demand
curve) is less than the marginal
cost (on the supply curve).
CHECKPOINT 7.3
Farmers gain.
Farmers produce more and
receive a higher price on what
they sell in the market, and they
Consumers/taxpayers lose. They
pay more for tomatoes and pay
taxes to fund the subsidy.
The deadweight loss is \$2 billion
(the area of the gray triangle).
CHECKPOINT 7.3
The outcome is unfair on both
views of fairness unless farmers
are poorer than the consumers, in
which case it might be fair to boost
farmers’ incomes.
CHECKPOINT 7.3
Study Plan Problem
The figure shows the market for
tomatoes. With the price support at
\$8 per pound, the quantity produced
is ____ because _____ .
A. inefficient; marginal cost is less
than marginal benefit
B. efficient; marginal cost equals
marginal benefit
C. inefficient; marginal benefit is
less than marginal cost
D. efficient; marginal benefit is less
than marginal cost
CHECKPOINT 7.3
The figure shows the market for
tomatoes. The government
introduces a price support for
tomatoes at \$8 per pound.
With the price support, _____ lose
and ______ gain.
A. farmers; consumers and taxpayers
B. consumers and taxpayers; farmers
and the government
C. taxpayers; farmers and consumers
D. consumers and taxpayers; farmers
CHECKPOINT 7.3
In the News
French farmers man the blockades in Brussels
Farmers want the dairy industry to guarantee a minimum
milk price of 300 euros a ton—against 210 euros a ton this
month. Max Bottier, a dairy farmer in Normandy, said that
he needs 300 euros a ton to break even.
Source: The Times, May 26, 2009
If a support price for milk set at 300 euros a ton, how will
the quantity of milk produced and the quantity bought by
consumers change? Who buys the surplus? Will the milk
market be more or less efficient than it is today?
CHECKPOINT 7.3
Solution
The market price today is 210 euros a ton.
A support price of 300 euros a ton will increase the
quantity of milk supplied and decrease the quantity of milk
demanded.
There will be a surplus of milk.
To maintain the support price at 300 euros a ton, the
government will have to buy the surplus of milk at the
support price.
The market will be less efficient because it creates a