3Checkpoint 7.1 Checkpoint 7.2 Checkpoint 7.3 Problem 1 Problem 1 ClickerversionProblem 3ClickerversionProblem 3ClickerversionProblem 4Problem 4Problem 4
4Practice Problem 1 CHECKPOINT 7.1 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?4
5CHECKPOINT 7.1SolutionA 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.5
6Practice Problem 2 CHECKPOINT 7.1 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 be? Explain your answer.6
7CHECKPOINT 7.1SolutionWith 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.7
8CHECKPOINT 7.1The highest rent that someone would offer is $1200 a month. This rent equals someone’s willingness to pay for the 1,000th apartment.8
9Practice Problem 3 CHECKPOINT 7.1 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?What is the deadweight loss?Is the housing market fair? Explain why or why not.9
10Solution CHECKPOINT 7.1 The housing market is not efficient. With 1,000 apartments rented, marginal benefit exceeds marginal cost and a deadweight loss arises.10
11CHECKPOINT 7.1The deadweight loss equals the area of the gray triangle: Deadweight loss equals ½ of (1,200 – 600) x (3,000 – 1,000). Deadweight loss is $600,000.11
12CHECKPOINT 7.1The 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.12
13MyEconLab clicker question Correct answer D CHECKPOINT 7.1Study Plan ProblemWith a strictly enforced rent ceiling of $600 a month, the housing market is _______.A. efficient because a rent ceiling gives poorer people greater access to housingB. efficient because the marginal cost of the last apartment rented is greater than its marginal benefitC. inefficient because the marginal cost of the last apartment rented is greater than its marginal benefitD. inefficient because the marginal benefit from the last apartment rented is greater than its marginal cost.The figure shows the rental market for apartments.MyEconLab clicker questionCorrect answer D13
14Oil price leaps to year’s high CHECKPOINT 7.1Practice Problem 4Oil price leaps to year’s highFor the first time in years, analysts forecast that proven reserves have fallen. On this news, the price of oil rose above $71 a barrel. Oil will last for years, but some analysts predict that the price could go as high as $250 a barrel.Source: guardian.co.uk, June 10, 2009If the government puts a price cap on gasoline at today’s average price of $2.60 a gallon, explain why a shortage will occur.Which allocation method is mostly likely to be used to distribute gasoline?
15The market price of gasoline will rise. CHECKPOINT 7.1SolutionGasoline is made from oil, so a rise in the price of oil increases the cost of making gasoline and decreases the supply of oil.The market price of gasoline will rise.A price cap at $2.60 a gallon will create a shortage because the price cap is below the market equilibrium price.Gasoline will be allocated by the first-come, first-served method unless the government rations gasoline, in which case it will be allocated by command.
16Practice Problem 1 CHECKPOINT 7.2 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?16
17CHECKPOINT 7.2SolutionThe 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.17
18Practice Problem 2 CHECKPOINT 7.2 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?18
19CHECKPOINT 7.2SolutionThe 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.19
20CHECKPOINT 7.2If a black market developed, the lowest wage that some workers might be able to earn would be $4 an hour.20
21Practice Problem 3 CHECKPOINT 7.2 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?21
22CHECKPOINT 7.2SolutionThe 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 deadweight loss.An additional loss arises as unemployed pickers search for jobs.22
23CHECKPOINT 7.2The 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.23
24MyEconLab clicker question Correct answer A CHECKPOINT 7.2Study Plan ProblemThe 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 fairB. efficient and fair only if the workers can increase the number of hours they workC. inefficient but fairD. efficient and fairE. efficient but not fairMyEconLab clicker questionCorrect answer A24
25MyEconLab clicker question Correct answer D CHECKPOINT 7.2The 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 pickersB. unemployed pickers; tomato growersC. tomato growers; tomato growers who find workD. employed pickers; tomato growers and unemployed pickersE. all pickers; tomato growersMyEconLab clicker questionCorrect answer D25
26India steps up pressure for minimum wage for its workers in the Gulf CHECKPOINT 7.2Practice Problem 4India steps up pressure for minimum wage for its workers in the GulfIndia is pressuring the oil-rich countries in the [Persian] Gulf to pay minimum wages to the 5 million unskilled Indians working in the Gulf.Source: International Herald Tribune, March 27, 2008If the Persian Gulf countries paid Indian workers a minimum wage above the equilibrium wage paid to other unskilled workers, would migrant Indian workers be better off, worse off, or unaffected by the higher wage?
27Most indians would be unemployed and sent back to india. CHECKPOINT 7.2SolutionThe supply of immigrant workers in the gulf is perfectly elastic, with workers coming from most south asian countries.If the wage paid to indian workers is above the equilibrium wage, the quantity of unskilled indians employed would decrease.Most indians would be unemployed and sent back to india.They would then compete to work in india and be worse off.
28Practice Problem 1 CHECKPOINT 7.3 The figure shows the market for tomatoes.What are the equilibrium price and quantity of tomatoes?Is the market for tomatoes efficient?28
29CHECKPOINT 7.3SolutionThe 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.29
30Practice Problem 2 CHECKPOINT 7.3 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 received by tomato farmers?30
31CHECKPOINT 7.3SolutionAt 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.31
32Practice Problem 3 CHECKPOINT 7.3 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?What is the deadweight loss? Could the price support be regarded as being fair?32
33CHECKPOINT 7.3SolutionThe 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).33
34CHECKPOINT 7.3Farmers gain. Farmers produce more and receive a higher price on what they sell in the market, and they receive the government subsidy. 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).34
35CHECKPOINT 7.3The 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.35
36MyEconLab clicker question Correct answer C CHECKPOINT 7.3Study Plan ProblemThe 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 benefitB. efficient; marginal cost equals marginal benefitC. inefficient; marginal benefit is less than marginal costD. efficient; marginal benefit is less than marginal costMyEconLab clicker questionCorrect answer C36
37MyEconLab clicker question Correct answer D CHECKPOINT 7.3The 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; farmersMyEconLab clicker questionCorrect answer D37
38French farmers man the blockades in Brussels CHECKPOINT 7.3Practice Problem 4French farmers man the blockades in BrusselsFarmers 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 said that he needs 300 euros a ton to break even.Source: The Times, May 26, 2009If a support price for milk set at 300 euros a ton, how will the support price change the quantity of milk produced, the quantity bought by consumers, and who buys the excess supply? Will the European milk market be more or less efficient than it is today?
39Solution CHECKPOINT 7.3 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—that is, pay farmers a subsidy.The market will be less efficient because it creates a deadweight loss.