Effect of Minimum Wage - Essay Example

MICRO 12ISA of Micro 12isa Effect of Minimum Wage Part A Governments impose minimum wages in order to attain the minimum level of income. Therefore wage rate increases which raise the firm’s input cost and in order to cut the cost it will hire fewer workers. In graph is the minimum wage and the unemployment increases which can be seen from the difference of Part B Federal Minimum Wage in U.S = $7.25 With the increase in the minimum wage by $0.50 will have greater effect regarding cost of restaurants in Texas and New York than in Wyoming. This increase in minimum wage decreases the surplus of the restaurants owners and in order to reduce that burden owners will hire fewer workers and increases the unemployment. This shows the boom period in which the minimum wage is increased because of which restaurants owners have to pay more to their waiters as well as it increases the cost of meals and would result in increase in unemployment. 2. Taxes (Oganisian, 2012) The demand and supply curve in the above graph show the impact of the taxes imposed by government on price and quantity demanded. In the above graph the Pe and Qe are the equilibrium price and quantity demanded respectively. Suppose the government imposed tax on any good and the amount of this tax is shared by both producers and the consumers as well. Supply curve shifts from S to S1 because of this tax as the producer desires to sell the good at higher prices in order to decrease the tax’s effect on him and this result in the increase in the price of the good from “Pe” to “Pt” as well as decrease in the quantity demanded “Qe” to “Qt.” Therefore from the graph we can conclude that if government imposes on any good it would result in decrease in the producer’s revenue, raises prices for consumers, and decreases the quantity of the good available in the market. 3. Who Pays a Tax? Perfectly Elastic Demand Curve and Normal Supply Curve Now let suppose the government put a tax on this product and also the demand curve is perfectly elastic then the supply curve shifts leftward that is the producer will decrease the supply of product because of which the producer’s surplus decreases and he will have to pay the tax. This we can in the graph given below. 4. Supply and Demand for Drugs Producers Costs Apparently the producers seem to have little costs due to the drug being illegal so the trading does not include any taxation. However the usual cost includes cost of production, transportation, legal actions that may be taken at any step by law enforcing agencies in case of being caught. Users Costs Such drugs are being sold in private markets and are sold at the price producer’s want to sell so the apparent cost to consumer is too much for the drug due to being contraband. In case the contrabands are made legal, governments will impose taxation and duties on their trading due to their harmful effects. Such duties will decline the producer surplus and the part of their income will be given to government agencies. But being a legal product it will have a competitive price and many firms will start selling the product thus competition will fix the price and it will be rather better and more economical to the consumers. 5. Graphing the Demand Curve Tacos Price of a 4 oz. regular taco (US $) 6 0 5.5 0.2 5 0.5 4 1 3 1.5 2 2 1.5 2.5 1 4 0 10 Part A The demand curve obtained through the chosen quantity of Tacos at each given price appears to have a nonlinear shape. However, it shows that with an increase in price the quantity demanded declines. Part B There appears to be a negative association between the price and quantity demanded of Tacos and it is also confirmed from the slope of the equation which is negative. As more price increases the slope gets steeper. 6. Choosing Optimal Consumption Part A: Budget Line In order to draw a budget line of Max we have to consider budget equation which is give as, This can also be expressed as, Where, Putting above values in budget equation we get, Subtracting from both sides, Dividing both sides by 10, we get, Now using the above equation we can draw a graph of Max’s Budget Line which is given below; Part B Hours Total Utility Windsurfing Marginal Utility Windsurfing MU @ $10 Total Utility Snookering Marginal Utility Snookering MU @ $5 1 120 120 12 40 40 8 2 220 100 10 76 36 7.2 3 300 80 8 106 30 6 4 360 60 6 128 22 4.4 5 400 40 4 140 12 2.4 6 412 16 1.6 150 10 2 7 422 10 1.0 158 8 1.6 In order to maximize the utility, Max will spend 3 hours on windsurfing and one hour on snookering. Out of $ 35 he will spend $30 on windsurfing and $5 on snookering. Marginal utility per hour of windsurfing and snookering is equal at 3rd hour of windsurfing and at 1st hour of snookering. 7. Drawing and Interpreting Utility Functions Part A The Utility Function given is U=I+C So for 3 scoops of Ice Cream and 1 piece of cake, the total utility is calculated as Part B Part C Since, the given utility function presents linear relationship, so the indifference curves obtained are also linear in shape. From the graph above it can be said that she’ll prefer to obtain one good while replacing the other and the good preferred depends upon her preference as well as price of the product (Chakravarty, 2009). 8. Relative Prices and the Budget Line Part A Real income of Marc in terms of root beer can be calculated by using the following formula, Therefore the real income of Marc in root beer’s term is $4. Part B In terms of CDs Marc’s real income can be found by using the formula given below, Therefore the real income of Marc in root beer’s term is $2. Part C Relative price is defined as the ratio of price of one good to the price of another good. Using this definition we can find the relative price of root beer in tem of CDs by the formula given below, Therefore the relative price of root beer is 0.5. Part C Opportunity cost is defined as the alternative with highest value that one gets by giving up something. It is also the ratio of prices of two goods; it can be by the formula given, Therefore the opportunity cost is 1/2. From above we can see that in order to get one can of root beer Marc has to forgo 2 CDs. Part D Marc’s Budget line equation can be calculated using the equation given below, This can also be expressed as, Where, Putting above values in budget equation we get, Subtracting from both sides, Dividing both sides by 5, we get, The above equation is the budget equation of Marc. Part F Part G The slope of budget line can be found by comparing budget line equation with slope intercept equation, On comparing we find the value of slope which is -2. Slope of shows that decrease in the price of root beer the steeper will be the budget line. Part H By using the utility function we can predict the quantity of root beer and CDs that Marc will buy. 9. Price Effect and Demand Curve At I=10$ References Chakravarty, S. R. (2009). Microeconomics. Allied Publishers. Oganisian, A. (2012). Economics 101: Taxes, Minimum Wages, and Why You Shouldn’t Boycott Sweatshops. The College Conservative. [Online] Available at http://thecollegeconservative.com/2012/02/23/economics-101-taxes-minimum-wages-and-why-you-shouldnt-boycott-sweatshops/ [Accessed 30th Jan 2013] Read More