Exercises: Minimum wage and price controls

Define a "price ceiling" and a "price floor". Give one example of each from the Irish economy.

The market equilibrium wage for cleaners in a town is €11 per hour. The Government sets a national minimum wage of €13 per hour. At €13, employers demand 4,000 workers and 5,500 workers offer to work.

1. a) Is the minimum wage binding? Explain.

1. b) How many workers are unemployed as a result?

State two arguments in favour of and two arguments against a national minimum wage.

The market for rented flats in Cork city has demand $Q_d = 4{,}000 - 2P$ and supply $Q_s = 1{,}000 + 1P$, where $P$ is the monthly rent in euro and $Q$ is the number of flats.

1. a) Calculate the equilibrium rent and quantity.

1. b) The Government introduces a rent cap at €900 per month. Calculate the quantity demanded, the quantity supplied and the shortage.

1. c) Explain two possible consequences for the quality and availability of rental housing.

Demand for low-skilled workers in a sector is $Q_d = 12{,}000 - 400W$ and supply is $Q_s = 2{,}000 + 600W$, where $W$ is the hourly wage in euro.

1. a) Find the equilibrium wage and employment.

1. b) A minimum wage of €12 is introduced. Calculate employment and unemployment.

1. c) Calculate the change in total wages paid to employed workers and say whether employed workers as a group gain.

The Government sets a minimum price of €1.20 per litre of milk, above the equilibrium of €0.90. At €1.20, farmers supply 600 million litres and consumers demand 450 million litres.

1. a) Calculate the surplus.

1. b) If the Government buys the entire surplus at the minimum price, calculate the cost.

1. c) Describe two alternative ways of dealing with the surplus and the effects on taxpayers.

Evaluate the effectiveness of a national minimum wage in Ireland. In your answer, use a labour market diagram described in words, consider the elasticity of labour demand, discuss the monopsony argument, and refer to the effects on poverty, employment and inflation.

A rent cap is applied to a city's housing market in which demand is relatively inelastic in the short run and supply is highly inelastic in the short run but elastic in the long run.

1. a) Explain the short-run and long-run effects of the cap on the quantity of rented housing available.

1. b) Calculate the deadweight loss if the demand function is $P = 2{,}000 - 0.5Q$, supply is $P = 500 + 0.25Q$ and the cap is €800. (Assume the quantity traded equals quantity supplied at the cap.)

1. c) Discuss two alternative policies that could address affordability without the same distortions.

"Price controls always make the intended beneficiaries worse off."

Evaluate this statement with reference to (i) a minimum wage, (ii) a maximum price (rent control) and (iii) a minimum price for alcohol. In each case, identify who benefits, who loses and any unintended consequences.