Question

Suppose producers bear most of the burden of a specific tax of 20 cents on staplers. Which ONE statement best describes the supply and demand for staplers?

Suppose sandals have an elastic own-price elasticity of demand. If price goes up by 2%, then what happens to quantity demanded?

In response to a snowstorm, the government sets a price ceiling on snow shovels. What is the likely outcome?

What is the likely consequence of minimum wage, a price floor?

Answer 1

1. Demand for staplers is more elastic than the supply. With the elasticity of demand, consumers have many more options and hence the quantity demanded will reduce a lot with even a slight increase in prices. So the most of the burden of the tax will have to be born by the Producer.

2. Own price elasticity of demand = % change in quantity demanded / % change in price

Elastic demand means own price elasticity > 1 - this implies that the % change in quantity demanded will be > 2%

3. There will be a shortage of snow shovels. Say the price of snow shovel was 70$ and the equilibrium quantity was 150 units. Now, in case of a snowstorm, the demand of the snow shovel would have increased, leading to an increase in prices of the snow shovel - say the equilibrium price is 100$ and quantity is 200 units. Now say, the government sets a ceiling at the original price of 70$. At 70$, suppliers would still be willing to supply 150 units, but with an increase in demand, quantity demanded would be much higher - leading to a shortage.

4. If the mininum wage is higher than the equilibrium wage in the labour market, it will lead to over supply of labour (increase in unemployment). Say the equilibrium wage level was 8/hr and the # of labour hours were 100 M hours. If the government imposes a minimum wage of 10$/hr, producers will be able to afford fewer workers due to impact on their profitability but the workers willing to work will increase - leading to an over supply of labour.