The table gives the demand schedule and the supply schedule for high school
graduates.
Wage rate Quantity of hours Quantity of hours
(dollars per hour) demanded supplied
16 9,000 4,000
17 8,000 5,000
18 7,000 6,000
19 6,000 7,000
20 5,000 8,000
(a) Draw the demand curve and supply curve of the labor market for high school
graduates together in the same diagram.
(b) What are the equilibrium wage and equilibrium quantity of employment?
(c) If a minimum wage is set at $17 an hour, what is the wage rate paid to high school
graduates? How many hours do high school graduates work? How many hours of
labor are unemployed?
(d) If a minimum wage is set at $19 an hour, what is the wage rate wage rate paid to
high school graduates? How many hours do high school graduates work? How many
hours of labor are unemployed?
(e) If the minimum wage is $19 an hour and demand increases by 500 hours a month,
what is the wage rate paid to high school graduates and how many hours of their labor
are unemployed?
b. The equilibrium wage rate is $18.50 an hour, and employment is 6,500 hours a
month.
c. The minimum wage is ineffective. The wage rate will be $18.50 an hour and
employment is 6,500 hours. There is no unemployment.
d. At $19 an hour, the market wage rate will be $19. 6,000 hours a month are
employed and 1,000 hours a month are unemployed.
e. The wage rate is $19 an hour, and unemployment is 500 hours a month. At the
minimum wage of $19 an hour, the quantity demanded is 6,500 hours a month
and the quantity supplied is 7,000 hours a month. So 500 hours a month are
unemployed.
Charlie’s Chocolates total product schedule is in the table.
Labor Output Marginal product Average product
(workers per day) (boxes per day) (boxes per day) (boxes per day)
1 12 _____
2 _____
24 _____
3 _____
48 _____
4 _____
84 _____
5 _____
121 _____
6 _____
192 _____
7 _____
240 _____
8 _____
276 _____
9 _____
300 _____
10 _____
312 _____
a. Complete the table above.
b. Draw the average product curve and marginal product of labor curve together in
the same diagram.
c. What is the relationship between the average product and marginal product when
Charlie’s Chocolates produces (i) less than 276 boxes a day and (ii) more than 276
boxes a day?
c. (i) When Charlie’s Chocolates produces fewer than 276 boxes a day, it
employs fewer than 8 workers a day. With fewer than 8 workers a day, marginal
product exceeds average product and average product is increasing. Up to an output of
276 boxes a day, each additional worker adds more to output than the average.
Average product increases.
(ii) When Charlie’s Chocolates produces more than 276 boxes a day, it employs
more than 8 workers a day. With more than 8 workers a day, average product exceeds
marginal product and average product is decreasing. For outputs greater than 276
boxes a day, each additional worker adds less to output than average. Average product
decreases.
Marc has an income of $20 per week. Root beer costs $5 a can and CDs cost $10
each. The figure illustrates his preferences.
a. Draw the budget line of Marc in the diagram above.
b. What are the quantities of root beer and CDs that Marc buys?
c. What is Marc’s marginal rate of substitution of CDs for root beer at the point at
which he consumes?
d. Now suppose that, the price of a CD falls to $5 and the price of root beer and
Marc’s income remain constant.
i. Draw the new budget in be diagram above.
ii. Find the new quantities of root beer and CDs that Marc buys.
iii. Find two points on Marc’s demand curve for CDs and sketch the demand
curve.
iv. Are CDs and root bear substitutes or complements?
b. The budget line is tangential to indifference curve I0 at 2 cans of root beer and 1
CD.
c. Marc’s marginal rate of substitution is 2.
d. i. The new budget line is tangential to indifference curve I1 at 1 can of root
beer and 3 CDs. Marc buys 1 can of root beer and 3 CDs.
ii. Two points on Marc’s demand curve for CDs are the following: At $10 a
CD, Marc buys 1 CD. At $5 a CD, Marc buys 3 CDs.
iii. They are substitutes.
Bob’s is one of many burger stands along the beach under perfect competition. The
figure below shows Bob’s cost curves.
a. If the market price of a burger is $4, what is Bob’s profit-maximizing output?
b. Calculate the economic profit that Bob’s makes.
c. With no change in demand or technology, discuss what will happen in the long
run in terms of the number of firms, market price and profit-maximizing output?
a. Bob’s profit-maximizing quantity is 300 burgers a day.
b. Bob’s economic profit is $300 a day. The average total cost of producing 300
burgers is $3.00 a burger, so total cost equals $900 a day ($3.00 multiplied by 300
burgers). Profit equals $1,200 minus $900, which is $300 a day.
c. The price will fall in the long run to $2.80 a burger and the profit-maximizing
quantity will be 250 burgers a day due to entry of firms.
