ECON 213 PROBLEM SET 2 | Complete Solution

Problem Set 2

Name: __________________________________________

Problem Set 2 is to be completed by 11:59 p.m. (ET) on Monday of Module/Week 4.

1. The following table presents data for wages in the market for internet security professionals.

(HINT: in the labor market the roles are reversed. Those who want to hire labor are the demanders. The workers enter the work force providing labor to the market place so they are the suppliers.)

What is the equilibrium wage? ___________________________________

Now, consider this scenario: Due to an increase in the internet security threats, the government wants to apply a price control in this market to encourage more people to become internet security professionals. Assume that a wage control is set at $75,000. Will this increase the number of people entering this labor market? Why or why not? Will this increase the number of people hired? Why or why not?

2. Assume you are a policymaker in Washington DC. Lobbyists for the preschoolers of America have put pressure on their representatives to cap prices on graham crackers. You have been assigned a position on a new committee to study the impact of a price ceiling on graham crackers.

Your job is to:

1. Illustrate using a fully labeled supply and demand graph (label all the axes and any lines you put in your graph) what such an artificial price looks like.
2. Explain what the results of such a move are for the graham cracker market. In other words, will there be a SHORTAGE, a SURPLUS, or neither created? Why?

3. Pollution is considered by most a negative externality. Some economists would like to see the costs of these burdens incorporated into the price of goods that we buy. For instance, since coal fire power plants increase emissions that could potentially lead to climate change, these economists believe that the price we pay for electricity is not adequately high enough. Draw a completely labeled graph and illustrate on the graph how much higher electricity prices would be if the full costs of electricity production were taken into account. You do not need to provide actual numbers; rather, show on the price axis where the price would be before the externality is considered and the price after the externality is included. What problems might exist in determining this new, externality based, price?

4. In the old days lighthouses were built along the coast to prevent ships from running aground on rocks in unfamiliar ports. By shining a beam of light over a port and guiding ships away from rocks, these vital buildings reduced the risk for ship captains and were generally considered to be extremely valuable resources. Curiously, lighthouses were almost always run and maintained by local governments. Explain in economic terms why private firms would not run a lighthouse.