Discussion of Answers to Quiz 3
Questions 1-3
More than 90% of the class got question 1 right. You can do this
one if you can draw a supply and demand curve.
About 80% of the class got question 2 right. You can do this if
you know what a sales tax paid by buyers does to the demand and/or supply
curves. This was discussed in great detail in the text and in class.
Only about half of the class got question 3 right. Excess burden
is defined and the way to calculate excess burden is demonstrated on pages
113-114 of your text.
Questions 4-6.
About 95% of the class got question 4 right. 75% got question 5 right
and 60% got question 6 right. To answer these questions properly,
you need to understand how a profit-maximizing firm decides how many laborers
to hire. This was discussed in lecture. It is also explained
on pages 147-48 of your text and you also are guided on how to do this
in the lab report for Experiment 5, pp 159-62.
Questions 7-11.
About 70% of the class got questions 7 and 8 right. This is
another simple application of the theory of derived demand for labor. See
the remarks regarding questions 4-6. Slightly less than half of the
class got question 9 right. This one should be easy if you know how
to draw the demand curve for labor (see question 8) and if you realize
that the supply curve will be vertical at 11 workers.
(Because there are only 11 workers and each of them has a reservation wage
of just about zero.) About 40% of the class got question 10 right.
To answer this, you had to be able to draw the demand curve for labor,
the supply curve for labor, and to know how to calculate involuntary unemployment
for a given minimum wage. (See pp 165-168 of the text.)
Questions 12 and 13
90% of the class got question 12 right and 75% got 13 right. See
page 169 of the text for a diagram that shows the qualitative result in
question 13. Of course to answer the numerical question, you need
to plug the ceiling price into the demand equation and the supply equation
and subtract quantity supplied from quantity demanded.
Questions 14 and 15
About half the class go Question 14 right and about one-third got Question
15 right.
To answer 14 correctly you simply had to read and understand pages
169-170 of the text. To answer question 15, you had to know the definition
of the price elasticity of supply and to realize that the new quantity
after the price ceiling went into effect will be on the same supply
curve as the original quantity. (See the picture on page 169.)
Price elasticities were discussed in detail in class. (About 2/3 of the
people whose scores on the test were in the upper quartile got 15 right,
while almost nobody in the bottom quartile got this right. ) Yes
it is important to go to class and pay attention to the lecture.
Question 16.
95% got this right. See the definition in the book.
Question 17.
90% got this right. See page 169 of the text.
Question 18.
35% got this right. It is important to think clearly about this.
Not every statement that sounds plausible is true. Indeed if you
really believed that this statement was true and if you were a firm in
Experiment 5, you left some serious money on the table.
Maximizing profit is not the same thing as maximizing
profits per worker. For example, in Experiment 5, Session
3 the equilibrium wage was about $15. Your revenue would be $30 if you
hired 1 worker, $55 with 2 workers, $75 with 3 workers and $95 with 4 workers.
At a wage of $20, you would make a profit of $10 if you hired 1 worker,
and $15 if you hired two workers. Your profit per worker be $10 with
1 worker and $7.50 if you hired only 1. Which gives you the higher
total profit? Which gives you the higher profit per worker?
Question 19
About 55% got this one right. This is again a definition straight
out of the text. See page 166.
Question 20
About 60% got this right. If you paid attention to what happened
in Session 3 of the minimum wage experiment and if you did your lab report
for this session, you should have been able to get this one.