Question

1. the supply function for farm labor is given by W = 2 + 4L. A Government program raises W from the competitive value 82 to 90. Find the increase in worker surplus.

2. Demand and short-run supply are given by

p=1/2 q :Supply

p= 12-q :Demand

a)

Find the equilibrium values for P and Q.

b)

The government adopts a price support program setting the support priceequal to 6. Find the equilibrium levels of production, consumption, and the government surplus (quantity). [Assume the government buys the excess.]

c)

Calculate the loss of consumer surplus, the gain in producer surplus, the increase in taxes, and the efficiency loss associated with the program described in part b. [hint: compare total surplus before and after]

d)

(572 only) The government program will cause total variable cost to increase by how much?

Answer 1

(1)

W = 2 + 4L

When L = 0, W = 2 (Vertical intercept of labor supply curve).

When W = 82, we have

82 = 2 + 4L

4L = 80

L = 20

Worker surplus = Area between supply curve and wage rate = (1/2) x (82 - 2) x 20 = 10 x 80 = 800

When W = 90, we have

90 = 2 + 4L

4L = 88

L = 22

Worker surplus = Area between supply curve and wage rate = (1/2) x (90 - 2) x 22 = 11 x 88 = 968

Increase in worker surplus = 968 - 800 = 168

NOTE: As per Answering Policy, 1st question is answered.