Question

Answer the questions below and each question has a part to complete required for that question

You have been contracted by the government of your country to provide recommendations on the regulation of the national textile industry. Currently, the textile industry which resembles features of the perfectly competitive market is completely unregulated. Using the concepts covered in the class, please provide your advice to the problems below.

1. One of the biggest social problems in the textile industry is child labour which, among other things, reduces school attendance. The government is considering two types of interventions and asked you to explain the process through which each of them affects the equilibrium amount of child labour and wages using words (explain the impact on demand and/or quantity demanded, supply, and/or quantity supplied as appropriate) and include well-labelled graphs.

a. Provide rewards for children who attend school [2pt]

b. Impose fines on employers who employ children [2pt]

2. Consider how own price elasticity of labour demand and supply affects the market outcomes for both policies. In addition to writing your answer in words, use well-labelled graphs to support your answer. Please draw new graphs, rather than using those from question 1.

a. How does own price elasticity of demand impact the effects of providing children who attend school with rewards on prices and the amount of child labour? [2pt]

b. How does the elasticity of supply impact the effectiveness of a fine on the employers who employ children? [2pt]

3. Production of textiles pollutes the groundwaters which negatively affects people and animals living in its vicinity.

a. What policy would you suggest to bring the production to the socially efficient level? [1pt]

b. Explain the logic behind the policy both in words [1pt] and using a graph [1pt]. Explain why you would want to correct the market equilibrium and what is the effect of your suggested policy on the equilibrium quantity and equilibrium price.

4. Imagine now that based on your recommendation, the government introduced a new regulation that limits child labour. In response, all firms except for two withdrew from the market. The groundwater pollution that results from the production of textiles remains unregulated. The remaining two firms simultaneously choose whether to pollute or change their production technology and stop polluting. If they both pollute, their profits are equal to P. If they both do not pollute, their profits are also equal to N. If one of them pollutes while the other one doesn’t, the firm that pollutes gets profits of M and the firm that doesn’t pollute gets profits of O.

a. What equilibrium concept that we have learned in class, can you use to solve what each of the firms is going to do? [0.5]

b. Write a normal form of this game [1pt]

c. What is the equilibrium outcome? [1pt]

d. Do firms have dominant strategies? List them and explain what a dominant strategy is. [1.5pt]

Answer 1

1) a)Provide rewards for children who attend school

The reward the child is getting for attending school must be greater than the wage they are receiving in a textile factory. Otherwise, this policy won't simply work. Now assuming the reward is higher than what the employer was paying then if we see from the employer's perspective for him the price of hiring each child is now higher. More and more child will attend the school as a result supply curve will shift leftward increasing the price of hiring a child from P₁ to P₂. See the following figure-1.

b)Impose fines on employers who employ children

Imposing a fine on employers is like imposing a tax on them, so an employer will try to shift the burden of fine on the child labours by reducing their wage. So now working is less rewarding for each child as they are receiving less and this maybe forces some of them to leave the job(assuming the supply of child labour is not inelastic) and on the other hand, hiring a child is also costlier for the employer now. To understand the situation after fine see the figure-2.

PP is the amount of fine. The employer is now paying a higher price P₂ but receiving a less amount of child for work denoted by q₁ which is less than previous quantity q₀. This policy could induce the employer to stop hiring child. On the other hand, the child who is supplying the labour will also receive a lesser amount denoted by P₁. This could force them to leave the job,