Economic Assignment

Q.4 (20 points) In a labor market, the labor is supplied by households and demanded by firms. Suppose that demand and supply curves of labor over the period of one week are given by Qd = 15 – W and Qs = W – 5, where Q is in the unit of million hours and W is a wage rate per hour, expressed in dollars.

(1) Suppose that the government imposes a minimum wage of \$12. How many people are unemployed among the people who desire to work? Use 40 hours as a full-time-equivalent (FTE), to convert excess supply of labor expressed in hours to the number of unemployed people.

(2) Facing the unemployment problem caused by the minimum wage, suppose that the government carries out a purchasing program, in which the excess supply of labor is bought by the government, i.e. unemployed people are hired by the government for the hours that they desire to work. Compute the size of government expenditure for the purchasing program, and the size of the deadweight loss to the society due to the minimum wage combined with the purchasing (i.e. hiring) program.

Q.5 (20 points)The inverse demand function is given by Px = 35 – (1/30)Qx. Good X is a divisible good.

• According to Professor Park’s lecture, the economic meaning of Qx in the inverse demand function is ‘quantity available.’ What is the economic meaning of Px in the inverse demand function? You must answer this question based on Professor Park’s lecture.
• How much consumer surplus do buyers receive when Qx = 600?

Q.6 (20 points) Suppose that an analyst conducts a study about the firms that have been acquired by other firms. The analyst finds that many firms’ being acquired by other firms were preceded by the acquired firms’ selling their subsidiaries, which action is called “divestiture.” Based on the finding, the analyst concludes that a firm’s divestiture
causes the firm’s being acquired by other firms. Someone else who is not involved in the study, however, argues that the conclusion has a problem of ‘reversed causality.’ Provide a possible reason why study’s conclusion could have a problem of ‘reversed causality.’

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