Question

1) "President Reagan proposed a lowering of the minimum wage for teenagers during the summer." Assume that there are normal demand and supply curves in the market for labor for both teenagers and adults and that the new, lower minimum wage is an effective one (below the old minimum wage, but still above what the equilibrium wage would be). What would be the effects of Reagan’s proposal on the market for teenage labor? During the summer months, what would be the effects on the market for adult labor with skills similar to teenagers? Explain how you arrived at your answers.

2) It is claimed that price floors and price ceilings both reduce the actual quantity exchanged in a market. Use a diagram or diagrams to support this conclusion, and explain the common sense behind it.

3) Explain why an effective minimum wage law that is not changed over time may eventually become ineffective as demand for workers increases.

4) Last October, the highest-paying passenger on United Flight 815 from Chicago to Los Angeles paid $1,248.51. The lowest-paying passenger on the same flight paid $87.21. Can we say anything about the likely elasticities of demand of the two customers? Use the concepts of marginal analysis and opportunity cost to explain why it might make sense for United Airlines to charge some lucky soul so little.

5) Why are college textbooks so expensive when other books that cost the same to produce have a lower price?

Answer 1

First question is answered below

1.

Lowering of minimum wages for teenagers during summers will reduce their incentive to work and increase their opportunity cost of time, thereby making them leave the labor market. This will reduce their supply in the labor Market.

Coming to the adult labor market, since adults and teenagers with same skills are substitutes, demand for adult labor will increase because of teenagers exiting the labor market, thereby shifting the demand curve of labor for adults to right, leading to an increase in their wages.