Suppose the market for quazdoodles can be described by the following equations:

Demand: P = 10 - Q Supply: P = Q - 2

where P is the price in dollars per unit and Q is the quantity in thousands of units. Then:

a. What is the equilibrium price and quantity?

b. Suppose the government imposes a tax of $1 per unit to reduce quazdoodle consumption and

raise government revenues. What will the new equilibrium quantity be? What price will the

buyer pay? What amount per unit will the seller receive?

c. Suppose the government has a change of heart about the importance of quazdoodles to the

happiness of the American public. The tax is removed and a subsidy of $1 per unit granted

to quazdoodle producers. What will the equilibrium quantity be? What price will the buyer

pay? What amount per unit (including the subsidy) will the seller receive? What will be the

total cost to the government?

2. Suppose the supply of low-skilled labor is given by

s = 10

Where s is the quantity of low-skilled labor (in millions of persons employed each year), and w is

the wage rate (in dollars per hour). The demand for labor is given by

^D = 80 10

a. What will be the free-market wage rate and employment level? Suppose the government

sets a minimum wage of $5 per hour. How many people would then be employed?

b. Suppose that instead of a minimum wage, the government pays a subsidy of $1 per hour

for each employee. What will the total level of employment be now? What will the

equilibrium wage rate be? How do employment and the wage rate compare to under the

minimum wage?