Question

Question: Suppose a student is willing to pay $30/hour for up to 10 hours of tutoring and a teacher is will...

Suppose a student is willing to pay $30/hour for up to 10 hours of tutoring and a teacher is willing to teach for $16/hour.

For each of the government policies given below (1) whether trade between the student and teacher will continue to take place and (2) the amount of dead weight loss (if any) created by policy.

A $15/ hour tax on the teacher. A $5/ hour tax on the teacher.

A $15/ hour tax on the student. A $5/ hour tax on the student.

A $15/ hour price ceiling.

A $31/ hour price floor.

A $15 subsidy for the teacher. Now suppose Student A is willing to pay $30 hour for up to 10 hours of tutoring and student B is willing to pay $20/hour for up to 10 hours of tutoring. teacher are willing to teacher for $15/hour.

Suppose the teacher from a union and charge 30/ hour. Are the teacher better off than if they charged $20? Does this union create dead weight loss? If so, how much?

Answer 1

For this question, it is important to understand the concept of price ceiling a price flooring.

Price ceiling is the maximum price at which the seller can sell their price. For example: the price of land/ flat is fixed by the government, the dealer cannot sell the property more than the fixed price.

Price flooring is the minimum price at which the seller has to sell its goods. For example: If the price of onion is set for 15 bucks per kg, then the seller cannot sell below this price.

In the case mentioned above, the consumer is willing to pay more and the teacher is willing to teach at less price. When the teacher is willing to teach at lesser rate, the demand will increase as compared to supply. This would lead to disbalance in equilibrium.

In order to set the equilibrium again, the government need to set the price so that the demand may come down.

If the teachers’ form a union and decides the prices then this will lead to dead weight loss because the demand will fall and led to disequilibrium.