1. Suppose that Congress caps executive pay at a level below the equilibrium. or a test in MyEconLab. . Explain how the quantity of executives demanded, the quantity sup- plied, and executive pay will change, and explain why the outcome is inefficient. * Draw a graph of the market for corporate executives. On your graph, show the market equilibrium, the pay cap, the quantity of executives sup- plied and the quantity demanded at the pay cap, and the dead weight loss created. Also show the highest pay that an executive might be offered in a black market. Use the following information to work Problems 2 to 4. Concerned about the political fallout from rising gas prices, suppose that the U.S. government imposes a price ceiling of $3.00 a gallon on gasoline. 2. Explain how the market for gasoline would react to this price ceiling if the oil-producing nations increased production and drove the equilibrium price of gasoline to $2.50 a gallon. Would the U.S. gasoline market be efficient? 3. Explain how the market for gasoline would react to this price ceiling if a global shortage of oil sent the equilibrium price of gasoline to $3.50 a gallon. Would the U.S. gasoline market be efficient? 4. Under what conditions would the price ceiling create lines at the pumps? 5. Suppose the government introduced a ceiling on lawyers' fees. How would the amount of work done by lawyers, the consumer surplus of people who hire lawyers, and the producer surplus of law firms change? Would this fee ceiling result in an efficient and fair use of resources? Why or why not? Use the following information to work Problems 6 and 7. Australian unions lobbying for $21 wage rise for lowest paid Australia's Fair Trade Commission (FTC) sets the minimum wage for the year. In 2008, the minimum wage was set at $544 a week. In the current negotiations, unions are lobbying for a $21 a week rise and businesses for a $8 a week rise. Source: Bloomberg, March 23, 2009 Suppose that in 2009 the equilibrium wage turns out to be $560 a week. 6. If the FTC raises the minimum wage by $8 a week, what wage per week will low-skilled workers be paid? Will the outcome be efficient? 7. If the FTC raises the minimum wage by $21 a week, what wage per week will low-skilled workers be paid? Will the outcome be efficient? Use the following information to work Problems & and 9. Crop prices erode farm subsidy program High corn and soybean prices mean farmers are making the most money in their lives. The reason: Grain prices are far too high to trigger payouts under the U.S. primary farm-subsidy program's "price support" formula. The market has done what Congress couldn't do and that is "slash farm subsidies." Source: The Wall Street Journal, July 25, 2011 B. Draw a graph to illustrate the soybean market when the soybean price was low. Show the quantity of soybeans produced, the subsidy farmers received, and the deadweight loss created. 9. In the market for com with a price support, explain why the corn price has risen and ended up being too high to "trigger payouts."
