Due Monday, Sept. 17, in Lecture, Uris G-01

Due Monday, Sept. 17, in Lecture, Uris G-01

Economics 102Professor McClelland

Fall 2007

Problem Set #2


Problem sets are to be turned in at the beginning of the lecture.

Boxes will be provided at the back of Uris G-01.

Place your problem set answers in the box with your TA’s name and section on it.

No credit will be given for late problem sets.

  1. Assume an isolated island nation has two labor markets - unskilled and skilled - and that the supply and demand conditions in each labor market are as follows:

Unskilled Workers / Skilled Workers
per year (thousand $) / Supply
per year (thousands) / Demand
per year (thousands) / Salary
per year (thousand $) / Supply
per year (thousands) / Demand
per year (thousands)
10 / 70 / 90 / 10 / 60 / 180
20 / 80 / 80 / 20 / 80 / 160
30 / 90 / 70 / 30 / 100 / 140
40 / 100 / 60 / 40 / 120 / 120
50 / 110 / 50 / 50 / 140 / 100
  1. For each market, using a supply-and-demand diagram, show the equilibrium price (the salary per worker per year) and the equilibrium amount of labor.
  2. Assume that the government introduces a minimum wage of $30,000 per year in both the labor markets. (No company can pay less than this minimum wage.) Show the impact of this minimum wage policy on equilibrium price and quantity in each labor market, using diagrams to illustrate your answer.
  3. Instead of introducing a minimum wage policy, the government introduces a new program to train unskilled workers to become skilled. Assume that this program is successful. How will it affect equilibrium price and quantity in both the labor markets? Use diagrams to illustrate your answer.
  4. A ferry service to the mainland is introduced, so now at a wage of $10,000 per year, an unlimited supply of unskilled foreign workers becomes available to the producers on this island. (i) What happens to the supply curve in each labor market (skilled and unskilled)? (ii) By how much will involuntary unemployment rise on this island nation? Again, use diagrams to illustrate your answers.


Economics 102 Problem Set #2

  1. If the demand for the 1890 United States $20 gold coins increases and the supply curve does not shift, then the price
  1. will rise and quantity will fall.
  2. and quantity will rise.
  3. will fall and quantity will rise.
  4. and quantity will fall.
  5. will rise but quantity will remain unchanged.
  1. If insect pests destroy much of America’s wheat crop this year, this will
  1. cause a movement up and to the left of the supply curve for wheat bread.
  2. induce greater demand for rye bread.
  3. cause a movement along the demand curve for wheat.
  4. induce an upward and leftward shift in wheat’s supply curve.
  5. all of the above.

BONUS QUESTION: The above questions total to 10 points. An additional 2 points can be earned by answering the following question correctly. If you answer this question, you must be prepared to explain why your answer is correct in section.

  1. You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. You would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. What is the opportunity cost of seeing Eric Clapton?
  2. $0
  3. $40
  4. $10
  5. $50