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(ECON110)110mid2006e.pdf
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Econ 110 Introductory Microeconomics
Midterm Spring 2006

Analytical Questions: Please answer all questions


1.
(15%) Recently there are demonstrations in France by students protesting against a government bill. According to the bill, there will be relaxation/easing of the restrictions firms face in firing employees aged below 26. The government defends the bill, claiming that it could reduce the 23% unemployment (rate) seen in the Below 25 Age Group.


a)
Using a diagram to explain the current situation in France for the Below 25 Age Group. Explain your diagram, particularly with reference to the current wage level for this age group.


b)
State whether you expect the bill would work as the government expects.






2.
(20%) The market for tobacco is represented by the following demand and supply functions (Prices denominated in $):

Demand:

Supply:


a)
Find the market equilibrium price and quantity.


b)
Now the government proposes to impose a per unit tax of $10 (sin tax) on the tobacco companies. Find the new equilibrium price and quantity.


c)
Which party, consumers or producers, eventually bears a larger tax burden and what is the share of that burden?






3.
(15%)

a) Bus is the major means of transportation for Peter. Will a tax of $0.50 per ride levied on bus travel have the same effect on Peter as a fixed monthly surcharge of $100 in terms of the amount of bus travel?
b) Peter current consumes 16 hours of leisure (including sleeping) per day and enjoys an hourly wage of $100. He considers his choice optimal.

i.
Write down his budget constraint.


ii.
The government plans to revise the social security plan by offering up to $800 a day to any unemployed person. Evaluate the impact of this on Peter using a diagram.




Suggested Solution

Note: This is just the OUTLINE of the suggested solutions. More detailed explanations, elaborations, and graphical representations are needed in order to gain full credit. Alternative answers will also be considered.

1.

Standard price floor type of problem.



The restrictions now in place make it difficult for firms to lay off young employees, implying a high effective wage rate faced by these firms in the labor market for youngsters.



Those restrictions and power of labor union mean little downside for wages.



High unemployment rate results and there is deadweight loss.



In theory, the government proposal should work if so restrictions are eased allowing the effective wage to go down as young works scramble to retain their jobs and competitiveness.




2.

a) p=25, q=75



b) p=32.5, q=67.5



c) Consumers burden: 7.5, producers burden: 2.5.




3.
a)




The per unit tax directly affects the price of bus ride which, regardless of its nature, has (negative) substitution effect, and therefore less bus