Question

Suppose a student is willing to pay $30/hour for up to 10 hours of teaching and a teacher is willing to teach for $16/hour.

a) What is the amount of economic welfare created by the student buying teaching services from the teacher?

b) For each of the government policies below, explain (i) whether the trade between the student and teacher will continue to take place (ii) the amount of deadweight loss (if any) created.

1. A $15/hour tax on the teacher. A $5/hour tax on the teacher.

2. A $15/hour tax on the student. A $5/hour tax on the student

3. A $15/hour price ceiling

4. A $31/hour price floor

5. A $15 subsidy for the teacher. A $15 dollar subsidy for the student

Now suppose Student A is willing to pay $30/hour for up to 10 hours of teaching and Student B is willing to pay $/hr for up to 10 hours of teaching. Teachers are willing to teach for $15 dollars.

6. Suppose the teachers form a union and charge $30/hr. Are the teachers better off than if they charged 20? Does the union create deadweight loss? If so, how much.

Answer 1

A) economic welfare=(30-16)*10=140$

B) i)No, deadweight loss=140

ii)No, deadweight loss=140

iii) Teacher won't sell its its services. Deadweight loss=140

iv) student won't buy services, deadweight loss=140

v)trade will happen,

6)when charge=20, teacher salary=20*2*10=400

When charge=30, teacher salary=30*10=300

So yes , teacher would be better off by charging 20$

Initial total surplus( with charge=20)=5*20+10*10=200

New Total surplus ( with charge=30)=15*10=150

Deadweight loss=200-150=50