Question

1. Sketch a graph of the market for peanut butter, labeling the supply and demand curves, both axes, and the equilibrium price and equilibrium quantity. Now, a per-unit tax is imposed on sellers in this market. SHOW and describe what happens in this market. Draw and label any curve shifting and any change in the equilibrium price or equilibrium quantity. What is the new price that buyers pay for peanut butter? What is the price that sellers get to keep (after they pay the per-unit tax to the government)? 2. Consider the labor market that begins in equilibrium. Now the government imposes a minimum wage in this market. [HINT: Do not need to draw any graphs for this question.] a. What would be the impact on this market if the minimum wage imposed by the government is below the equilibrium wage? DESCRIBE verbally; do not draw. b. What would be the impact on this market if the minimum wage imposed by the government is above the equilibrium wage? DESCRIBE verbally; do not draw.

Answer 1

Peanut butter market is a commodity market and peanut butter is a normal good. The demand curve is a graphical represenatation of relationship beteween price of the good and the quantity demanded of the good. and supply curve is the relation ship between quantity supplied and price of the good. The demand curve is down ward sloping and supply curve is upward sloping. the demand curve follows law of demand that says an inverse relation between quantity demanded and price. The supply curve follows law of supply that says a direct relationship between price and quantity. The two variables quantity and price are shown on X axis and Y axis repsectively. The equlibrium point is where the two curves meet and corresponding price is equilibrium price and correspinding quantity is equilibrium quantity. see the graph :

If a per unit tax is imposed on sellers then the cost of production will increase.so the sellers will reduce supply and supply curve will shift to left. The burden of tax will be passed to customers also as an increase in prices due to increased cost of production and  so overall prices in industry will rise this rise in overall prices will reduce the demand as the buyer will now pay a higher price which will include tax. The new equilibrium price will be higher and is given by OP' in the diagram and new equilibrium quantity will be OQ'. the sellers will sell less and buyers will buy less and overall market will shrink. The producer's surplus will Increase and the price they will get to keep will be the same price as before tax.

2- In the labour market the equilibrium wages are given by the point where demand for labour is equal to the supply of labour. If government imposes a minimum wage which is below equilibrium wages the market does not get changed and works as if there are no minimum wages. As minimum wages are a ceiling that producers can not pay less than these wages but the market is already in equilibrium and equilibrium wages are higher than the minimum wages.

In case the minimum wages are higher than the equilibrium wages than it will reduce employment. The cost of production will increase and producers will try to maximise there revenue and therefore they  will reduce the cost of production so they will lay off some labor. The labor will be in surplus as there will be more people willing to work due to high wages.