Question

1) The Australian Ministry of Education recently required that high schools must hire five additional teachers with Master’s degrees in Mathematics.

a. It will take a few months to initiate the hiring process. Discuss the immediate effect on the salaries of teachers with Master’s degrees in Mathematics? Illustrate graphically the effects on the market for Master’s degree mathematic teachers in the short-run.

b. What will be the effect after five years? Discuss and illustrate graphically the effects on the market for Master’s degree mathematic teachers in the long-run. How does the salary in the long-run compare to the short-run and why?

c. Discuss the differences between the short-run and long-run elasticities of supply.

2) Suppose Fred is only willing to buy a bike seat if he can also buy a bike seat cover to go with it, i.e. Fred needs an equal number of bike seats and bike seat covers. Fred has $100 in income.

a. Suppose bike seat covers cost $1 and bike seats cost $19. How many of each will Fred buy? Discuss and illustrate graphically.

b. Suppose the price of bike seats increases to $49. How will Fred react to the price change? Discuss and illustrate on the same graph as in part a.

3) Suppose John consumes pedal bikes and e-bikes. The price increases for pedal bikes and John continues to purchase the same quantity as before the price increase. Illustrate graphically the price-consumption curve and pedal bike demand curve on two separate graphs given this information. Discuss the directions and magnitudes of the income and substitution effects. Are pedal bikes normal or inferior for John? Explain.

4) Jim realizes that if he employs an additional bike builder, then he will be able to increase the number of bikes built in his bike shop by 15 bikes per day. The daily salary he will need to pay the bike builder is $200. How much is the cost for an additional bike? Describe the general relationship between the marginal product and marginal cost curves.

5) The NRG Arena in Houston faces a downward sloping demand curve for tickets to football games and the stadium has a fixed number of seats available. Assume the marginal cost of filling a seat is zero. Why might the NRG Arena decide not to sell out every football game even though the marginal cost of selling additional seats is virtually zero? Discuss and illustrate graphically

Answer 1

Answer 1:

a. In the labor market of Mathematics teachers, the above requirement by the government will increase the demand of teachers who have dome their masters in mathematics. Since, this is the short run case, so we consider the elasticity of supply of labor to be relatively inelastic in the short run. This is because in the short run the value of elasticity is less as compared to value of elasticity in the long run.In the labor market, initial equilibrium occurs at point E1. the above change will shift the demand curve for mathematics teachers rightwards to Ld' and new equilibrium shifts from point e1 to point E2 where salaries of these teachers has increased by a greater amount as compared to the increase in employment because supply curve is relatively inelastic.This is depicted in the diagram below:

b. In the long run, the value of elasticity of supply will increase and thus the supply curve of mathematics teachers will become more elastic and for the same rightward shift of the labor demand curve, the new equilibrium occyrs at point e2 where increase in salaries is less as compared to the increase in employment because supply elasticity has increased. This shows that increase in salaries in the short run was more as compared to the increase in salalries in the long run because price elasticity of supply is more in the long run as compared to short run.

c. In the short run value of price elasticity of supply is less than the value of price elasticity of supply in the long run. This is because in the short run, it is difficult for the teachers to attain the degree as it is a two year course.  On the other hand, in the long run more and more teachers will be able to complete their courses and this will make the supply curve elastic in the long run.