II.

Correct the mistakes

1. Depends on → Does not depend on

2. The demand curve and the supply curve → The demand curve only
3. fall entirely on the sellers → fall on both sellers and buyers
4. greater → smaller
5. sellers to receive more for the good ---> sellers to receive less for the good
6. Encourage → discourage
7. different → the same
8. Less → more
9. Not binding → Binding
10. does not change when the government imposes a tax on that market because the loss of consumer
surplus and producer surplus is equal to the gain of government revenue. → decreases by the size
of deadweight loss
11. producer surplus decreases but consumer surplus increases → Both producer surplus and
consumer surplus decreases
12. the deadweight loss doubles → increase more than double
13. greater → smaller
14. still causes → would not cause
15. Increase → decrease
Problem 1 - Answer
a. Figure 9 shows the effects of the minimum wage. In the absence of the minimum
wage, the market wage would be w1 and Q1 workers would be employed. With the
minimum wage (wm) imposed above w1, the market wage is wm, the number of
employed workers is Q2, and the number of workers who are unemployed is Q3 − Q2.
Total wage payments to workers are shown as the area of rectangle ABCD, which
equals wm times Q2.

Figure 9

b. An increase in the minimum wage would decrease employment. The size of the
effect on employment depends only on the elasticity of demand. The elasticity of
supply does not matter, because there is a surplus of labor.

c. The increase in the minimum wage would increase unemployment. The size of the
rise in unemployment depends on both the elasticities of supply and demand. The
elasticity of demand determines the change in the quantity of labor demanded, the
elasticity of supply determines the change in the quantity of labor supplied, and the
difference between the quantities supplied and demanded of labor is the amount of
unemployment.

d. If the demand for unskilled labor were inelastic, the rise in the minimum wage would
increase total wage payments to unskilled labor. With inelastic demand, the
percentage decline in employment would be lower than the percentage increase in
 the wage, so total wage payments increase. However, if the demand for unskilled
labor were elastic, total wage payments would decline, because then the
percentage decline in employment would exceed the percentage increase in the
wage.

Problem 2 – Answer
a. Figure 8 shows the effect of a $10 tax on hotel rooms. The tax revenue is
represented by areas A + B, which are equal to ($10)(900) = $9,000. The deadweight
loss from the tax is represented by areas C + D, which are equal to (0.5)($10)(100) =
$500.

Figure 8 Figure 9

b. Figure 9 shows the effect of a $20 tax on hotel rooms. The tax revenue is
represented by areas A + B, which are equal to ($20)(800) = $16,000. The
deadweight loss from the tax is represented by areas C + D, which are equal to
(0.5)($20)(200) = $2,000.

When the tax is doubled, the tax revenue rises by less than double, while the
deadweight loss rises by more than double.