PS 4 Due in Section during the Week of March 3

1) This recent New York Times article describes the current political debate surrounding legislation for a new trade agreement: http://www.nytimes.com/2014/01/31/business/reid-pushes-back-on-fast-track-trade-authority.html?_r=0 Using the insights from the economics of trade that we discussed in class, as well as your own views on trade, discuss the strengths and weaknesses of a) President Obamas position on the legislation b) The Congressional Democrats position. Total: no more than 1 page.

2) This article from last week New York Times discusses the possible effects of a recent proposal to raise the U.S. minimum wage: http://www.nytimes.com/2014/02/19/business/mixed-results-in-us-study-of-increasing-minimumwage.html?ref=business a) Draw a graph of the US labor market. Label all the axes and the curves. Assume that all workers are the same, the current equilibrium wage (before the proposed change in minimum wage) is $8 an hour and that at that wage there are 2 million employed workers and no unemployment. b) Now show what happens to employment when the minimum wage legislation described in the article is adopted. Use the actual figures from the article to label all the relevant points in the graph. c) The report predicts that an increase in the minimum wage would lift 900,000 households out of poverty. Explain why. d) (Optional) Given the information on the first paragraph, what is the slope of the labor demand curve? Explain how you got to the answer. Assume that the equilibrium wage before the change in policy is $8 an hour and that the demand curve is linear.

3) Chapter 10: Question 3

A local drama company proposes a new neighborhood theater in San Francisco. Before approving the building permit, the city planner completes a study of the theaters impact on the surrounding community. a. One finding of the study is that theaters attract traffic, which adversely affects the community. The city planner estimates that the cost to the community from the extra traffic is $5 per ticket. What kind of an externality is this? Why? b. Graph the market for theater tickets, labeling the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output, and the efficient level of output. Also show the per-unit amount of the externality. c. Upon further review, the city planner uncovers a second externality. Rehearsals for the plays tend to run until late at night, with actors, stagehands, and other theater members coming and going at various hours. The planner has found that the increased foot traffic improves the safety of the surrounding streets, an estimated benefit to the community of $2 per ticket. What kind of externality is this? Why? d. On a new graph, illustrate the market for theater tickets in the case of these two externalities. Again, label the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output, the efficient level of output, and the per-unit amount of both externalities. e. Describe a government policy that would result in an efficient outcome.

4) Chapter 10: Question 4

Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people who do not drink and drive. a. Illustrate the market for alcohol, labeling the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output, and the efficient level of output. b. On your graph, shade the area corresponding to the deadweight loss of the market equilibrium. (Hint: The deadweight loss occurs because some units of alcohol are consumed for which the social cost exceeds the social value.) Explain.

5) Chapter 11: Question 7 There is often litter along highways but rarely in peoples yards. Provide an economic explanation for this fact.