ECON10004: INTRODUCTORY MICROECONOMICS

TASKS FOR TUTORIAL 5

(Week beginning April 1)

TASK 1

In the Australian labour market there is demand for and supply of low-skill
labour:
QD = 10,000 – 500w
QS = 500w
where QD = quantity of hours of low-skill labour demanded by Australian firms,
QS = quantity of hours of labour supplied by low-skill Australian workers, and w
= wage rate per hour of low-skill labour.

Assume that the Australian labour market for low-skill labour is perfectly
competitive.

a) What will be the equilibrium wage rate and total hours of low-skill labour in
this market? What is the low skill wage bill and wage income?

b) Suppose now that Australian businesses can ‘import’ any quantity of low-skill
labour they want via a special government visa scheme for low-skill immigrants.
The cost of each hour of ‘imported’ labour will be $5 per hour.

What will be the effect of the scope to ‘import’ low-skill labour on:
i) The equilibrium wage rate for low-skill labour in Australia?
ii) The total hours of low-skill labour supplied by Australian workers?
iii) Total hours of low-skill labour demanded by Australian firms?
iv) Quantity of low-skill labour imported?

c) Using a diagram and table (like the one below), show the effect of introducing
the scope to ‘import’ low-skill labour on:
i) Surplus for Australian low-skill workers;
ii) Surplus for Australian firms; and
iii) Total surplus to Australian society.

Autarky With Change

international
trade
(i) Surplus to
Australian
workers
(ii) Surplus to
Australian firms

(iii) Total surplus

d) Show how the market outcome and surplus to Australian low-skill workers
and firms would be affected (compared to the outcome with no restrictions on
immigration) by the government imposing a tax of $2.50 per hour of low-skill
labour that is ‘imported’ by an Australian firm.
International With tax on Change
trade imported
workers
(i) Surplus to
Australian
workers
(ii) Surplus to
Australian firms
(iii) Government
revenue

(iv) Total surplus

TASK 2
Assume that the market for gas in OzLand is perfectly competitive. OzLand is a
net exporter of gas (that is, it exports gas to the rest of the world).

a) The world price for gas has recently decreased by $100 per unit, from WP 1 to
WP2, because producers in RusLand have found a new rich source of gas.
Suppose OzLand continues to be an exporter of gas after the change. Explain how
this decrease in the world price will affect the equilibrium outcome in the market
for gas in OzLand. How will the well-being of OzLand consumers of gas and
OzLand suppliers of gas be affected? What is the effect on total surplus in the
market for gas in OzLand?

b) The government of OzLand announces that, in order to compensate for this

decrease in the world price of gas, the government will introduce an export
subsidy per unit of gas exported by OzLand suppliers. The per-unit export
subsidy amount will be exactly the same as the amount by which the world price
for gas has decreased. That is, the government will subsidise all OzLand
suppliers by $100 per unit of production that is exported to the international
market.

Aaron, the treasurer of OzLand, says: “This new subsidy will exactly offset the
effect of the decrease in world price. Hence, well-being in OzLand will exactly be
the same as before the world price decrease.” Is Aaron correct? Explain by
calculating the change in consumer surplus, producer surplus, and total surplus.
Assume that after the implementation of the export subsidy, domestic consumers
in OzLand pay the subsidy-inclusive price in OzLand. That is, they are not able to
buy internationally at the lower world price, WP2.
 Autarky With Change
international
trade
(i) Surplus to B+E E -B
Australian
workers
(ii) Surplus to A A+B+C+D +B+C+D
Australian
firms
(iii) Total A+B+E A+B+C+D+E +C+D
surplus

International With tax on Change

trade imported
workers
(i) Surplus to G G+C +C
Australian
workers
(ii) Surplus A+B+C+D+E+F A+B -C-D-E-F
to Australian
firms
(iii) 0 E +E
Government
revenue
(iv) Total A+B+C+D+E+F+G A+B+C+G+E -D-F
surplus
 PW1 PW2 Change
Consumer A A+B+C +B+C
surplus
Producer B+C+D+F+G+H+I F+G+H+I -B-C-D
surplus
Total surplus A+B+C+D+F+G+H+I A+B+C+F+G+H+I -D

PW2 PW1 (PW2+s) Change

Consumer A+B+C A+B+C 0
surplus
Producer F+G+H+I B+C+D+F+G+H+I B+C+D
surplus
Gov. 0 -B-C-D-E -B-C-D-E
Revenue
Total surplus A+B+C+F+G+H+I A+B+C-E+F+G+H+I -E

PW1 PW2 Change

Consumer A A+B+C +B+C
surplus
Producer B+C+D+E+F+G+H E+F+G+H -B-C-D
surplus
Total surplus A+B+C+D+E+F+G+H A+B+C+E+F+G+H -D
 PW2 PW1 (PW2+s) Change
Consumer A+B A+B 0
surplus
Producer E+F+G B+C+E+F+G B+C
surplus
Gov. 0 -B-C-D -B-C-D
Revenue
Total surplus A+B+E+F+G A+B-D+E+F+G -D

An export subsidy increases the price of gas exports received by producers by

the amount of subsidy, s. At the price PW2, before the subsidy is put in place,
domestic consumers buy quantity QD2 of gas, producers supply QS2, and the
country exports the quantity QS2 – QD2. With the subsidy put in place, suppliers
get a total price per unit of WP2 + s because they receive the world price for their
exports WP2 and the government pay them the subsidy of s. However, note that
domestic consumers can still buy gas at WP2 by importing it. Domestic firms do
not want to sell gas to domestic customers, because they do not get the subsidy
for doing so. So domestic companies will sell all the gas they produce abroad, in
total quantity QSs (=QS1) Domestic consumers continue to buy quantity QD2. The
country imports gas in quantity QD2 and exports the quantity QSs so net exports of
gas are the quantity QSs – QD2

The end result is that the domestic price of gas is unchanged, the quantity of gas
produced increases, the quantity of gas consumed is unchanged, and the quantity
of gas exported increases.

Consumer surplus is unaffected, producer surplus rises, government revenue

declines because there is a decline in total surplus.

Thus, it is not a good policy from an economic standpoint because there is a

decline in total surplus.