Question

Explain why the following statements are true or false:                                                       

A: Exporting a good reduces consumer surplus therefore overall economic welfare decreases.                                                              

B: Importing a good reduces producer surplus therefore overall economic welfare decreases.                                                     

C: A tariff reduces imports, increases domestic production and producer surplus therefore overall economic surplus increases.       

D: Export subsidies increase both consumer and producer surplus thereof they improve overall net economic welfare. 


4.

Explain why the following statements are either true or false:

A: In a competitive labor market, a minimum wage above the market equilibrium will reduce the level of employment.

B: In a monopsony labor market, a minimum wage set above equilibrium will always reduce the level of employment.

C: In bilateral monopoly labor markets the monopsony employer and the union bargain to an outcome that is closer to a competitive equilibrium.

D: If two industries have identical labor supplies and operate in competitive labor markets then there is no reason for them to have different wage levels. 


Answer 1

1 )

A) True

Consumers of the exporting nation face reduced levels of well-being as well as increased levels of domestic price due to increasing exports and export subsidy. As the price levels in the domestic market rises, the consumer surplus reduced significantly.

B) True

Consumers importing goods reduces the sales of domestically manufactured goods as consumers face cheaper prices from international market commodities and hesitate from buying domestically manufactured goods due to the high price when compared to the price of foreign goods. This thus reduces the producer surplus as they now are forced to reduce their price as well.

C) True

Tariffs are imposed on imports which raise the price of the commodity. This puts the producer of domestically manufactured goods at an advantage and at a position to sell goods cheaper than imports and thus gain the market. Tariffs increase domestic production as demand for cheaper domestic goods rise within the market. Such a situation enables the consumer to get a good price as well as the producer to sell at a decent profit margin, thereby increasing economic surplus.

D) False

Export subsidies do not increase consumer surplus. Export subsidies are granted to producers as an effort to increase export volume. An export subsidy do not increase consumer surplus, and in fact reduces it as a result of increased price levels for domestically manufactured goods.

4)

A) True

A minimum wage above equilibrium level results in an increase in the number of workers supplied in the labor market. This thus results in excess supply of labor and creates unemployment in the labor market.

B) False

In a monopsony market, where there is one buyer and many sellers, there is one firm in the market with the power in employing the factors of production. In such cases, when the wage rate is higher than the equilibrium rate, the level of employment also rises due to the resultant increase in wages.

C) True

In a bilateral monopoly labor market is only one seller and buyer and at the same time in a monopsony, there is only one employer of factors of production. In such situations where the supply is also provided by a few firms, they tend to come into an agreement on wages and prices in order to keep the market close to a competitive equilibrium which is profitable for all parties in the market.

D) True

When there exists identical labor supply in two different industries, and the labor market is competitive in general, then both the industries tend to adopt the same wage rate and not employ labor at different wage rates. This case hold true given that the set of skill set for the labors for both the industries are same and constant. Let us see a diagram,

MARKET FOR LABOR INDUSTRY 1 INDUSTRY 2 S MARGINAL REVENUE PRODUCT(MRP) MRP WAGE RATE WAGE RATE E F W W D 0 Ov NUMBER OF LABORS Q QTY OF LABORS EMPLOYED QTY OF LABORS EMPLOYED