المملكة العربية السعودية
وزارة التعليم
الجامعة السعودية اإللكترونية
Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University
College of Administrative and Financial Sciences
Assignment 1
Macroeconomics (ECON 201)
Due Date:4th March 2022 @ 23:59
Course Name: Macroeconomics
Student’s Name:
Course Code: ECON201
Student’s ID Number:
Semester: II
CRN:
Academic Year:2021-22-2nd
For Instructor’s Use only
Instructor’s Name:
Students’ Grade: 00 / 10
Level of Marks: High/Middle/Low
General Instructions – PLEASE READ THEM CAREFULLY
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The Assignment must be submitted on Blackboard (WORD format only) via
allocated folder.
Assignments submitted through email will not be accepted.
Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
page.
Students must mention question number clearly in their answer.
Late submission will NOT be accepted.
Avoid plagiarism, the work should be in your own words, copying from students
or other resources without proper referencing will result in ZERO marks. No
exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced)
font. No pictures containing text will be accepted and will be considered
plagiarism).
Submissions without this cover page will NOT be accepted.
Chapter 4 & 6: Case Study: Supply, Demand, and Market Equilibrium: (10 Points)
In the first assignment for the Macroeconomics course, the students are required to choose a specific area from
the subject and answer the questions given, upon successful completion of the assignment; the student should
be able to achieve the following learning outcomes:
Learning Outcomes:
1. Define the institutional framework of macroeconomic policymaking. [CLO 1.1]
2. Analyze economic problems within the conceptual framework of mainstream macroeconomics.
[CLO 2.1]
Reference Source:
Textbook: – Mankiw, N. Gregory. Principles of Macroeconomics, 6th ed. Mason, OH: South-Western
Cengage Learning, 2011. ISBN: 9780538453066 (hard copy); ISBN: 9781115468523 (eBook)
Case Study:1 (5 Points)
Please read the case “Two Ways to Reduce the Quantity of Smoking Demanded” from Chapter 4
“Supply, Demand, and Market Equilibrium” Page: – 71 given in your textbook – “Principles of
Macroeconomics”. The case study presented in the chapter discussed cigarette taxes as a way to reduce
smoking. Now think about the markets for other tobacco product such as cigars and chewing tobacco. and
Answer the following Questions:
Questions:
1.1. Are these goods substitutes or compliments for cigarettes? (100 – 150 words – 1.25 point)
1.2.Using a supply and demand diagram, show what happens in the markets for cigars and chewing
tobacco if the tax on cigarettes is increased. (100 – 150 words – 1.25 point)
1.3.If policy makers wanted to reduce total tobacco consumption, what policies could they combine
with the cigarette tax? (100 – 150 words – 1.25 point)
1.4.How can we reduce the consumption of cigarettes in economics? (100 – 150 words – 1.25 point)
Important Note: – Support your submission with course material concepts, principles, and
theories from the textbook and at least two scholarly, peer-reviewed journal articles.
Case Study:2 (5 Points)
Please read the case “The Minimum Wage” from Chapter 6 “Supply, Demand, and Government
Policies” Page: – 117 given in your textbook – “Principles of Macroeconomics”. A case study
discusses the federal minimum-wage law.
Questions:
2.1.Suppose the minimum wage is above the equilibrium wage in the market for unskilled labor.
Using a supply and-demand diagram of the market for unskilled labor, show the market wage,
the number of workers who are employed, and the number of workers who are unemployed.
Also show the total wage payments to unskilled workers. (100 – 150 words – 1.25 point)
2.2.Now suppose the secretary of labor proposes an increase in the minimum wage. What effect
would this increase have on employment? Does the change in employment depend on the
elasticity of demand, the elasticity of supply, both elasticities, or neither? (100 – 150 words –
1.25 point)
2.3.What effect would this increase in the minimum wage have on unemployment? Does the change
in unemployment depend on the elasticity of demand, the elasticity of supply, both elasticities, or
neither? (100 – 150 words – 1.25 point)
2.4.If the demand for unskilled labor were inelastic, would the proposed increase in the minimum
wage raise or lower total wage payments to unskilled workers? Would your answer change if the
demand for unskilled labor were elastic? (100 – 150 words – 1.25 point)
Important Note: – Support your submission with course material concepts, principles, and
theories from the textbook and at least two scholarly, peer-reviewed journal articles.
Answer:
Figure
In panel (a), the government imposes a price floor of $2. Becausethis is below the
equilibrium price of $3, the price floor has no effect. The market price adjusts to
balance supply and demand. At the equilibrium, quantity supplied and quantity
demanded both equal 100 cones. In panel (b), the government imposes a price floor
of
$4,
is above
which
A
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the equilibrium price of $3. Therefore, the market price equals
supplied at this price and only 80 are demanded, there is a
$4. Because 120
cones are
surplus of 40 cones.
(a) A Price Floor That ls Not Binding
Price
(h) A Price Floor That ls Binding
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the floor, the price floor is a binding constraint on the market. The forces of supply and demand tend to move the price toward the equilibrium price, but when
the market price hits the floor,
it can fall no further.
The market price equals the
price floor. At this floor, the quantity of ice cream supplied (120 cones) exceeds
the quantity demanded (80 cones). Some people who want to sell ice cream at the
going price are unable to. Thus, n binding pricefloor causes a surplus.
Just as the shortages resulting from price ceilings can lead to undesirable
rationing mechanisms, so can the surpluses resulting from price floors. In the
case of a price floor, some sellers are unable to sell all they want at the market
price. The sellers who appeal to the personal biases of the buyers, perhaps due to
racial or familial ties, are better able to sell their goods than those who do not. By
contrast, in a free market, the price serves as the rationing mechanism, and sellers
can sell all they want at the equilibrium price.
$
TheMinimumWage
a price floor is the minimum wage. Minimum-wage
laws dictate the lowest price tor labor that any employer may pay. The U5.
Congress first instituted a minimum wage with the Fair Labor Standards Act
An important example of
1938 to ensure workers a minimally adequate standard of living. In 2009,
the minimum wage according to federal law was $7.25 per hour. (Some states
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mandate minimum wages above the federal level.) Most European nations have
minimum-wage laws as well; some, such as France and the United Kingdom,
have significantly higher minimums than the United States.
To examine the effects of a minimum wage, we must consider the market for
labor. Panel (a) of Figure 5 shows the labor market, which, like all markets, is subject to the forces of supply and demand. Workers determine the supply of labor,
and firms determine the demand If the government doesn’t intervene, the wage
normally adjusts to balance labor supply and labor demand.
Panel (b) of Figure 5 shows the labor market with a minimum wage. If the
minimum wage is above the equilibrium level, as it is here, the quantity of labor
supplied exceeds the quantity demanded. The result is unemployment. Thus, the
minimum wage raises the incomes of those workers who have jobs, but it lowers
the incomes of workers who cannot find jobs.
To fully understand the minimum wage, keep in mind that the economy
contains not a single labor market but many labor markets for different types of
workers. The impact of the minimum wage depends on the skill and experience of
the worker. Highly skilled and experienced workers are not affected because their
equilibrium wages are well above the minimum. For these workers, the minimum
wage is not binding.
The minimum wage has its greatest impact on the market for teenage labor.
The equilibrium wages of teenagers are low because teenagers are among the least
skilled and least experienced members of the labor force. In addition, teenagers
are often willing to accept a lower wage in exchange for on-the-job training. (Some
teenagers are willing to work as “interns” for no pay at all. Because internships
pay nothing, however, the minimum wage does not apply to them. lf it did, these
Figure
5
Panel (a) shows a labor market in which the wage adjusts to balance labor supply
and labor demand. Panel (b) shows the impact of a binding minimum wage. Because
H°w ‘he Minimum wage
Affens the Labor Mark“
the minimum wage is a price floor, it causes a surplus: The quantity of labor supplied
exceeds the quantity demanded. The result is unemployment.
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SUPPLY, DEMAND, AND GOVERNMENT POLICIES
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CHAPTER6
jobs might not exist.) As a result, the minimum wage is more often binding for
teenagers than for other members of the labor force.
Many economists have studied how minimum-wage laws affect the teenage
labor market. These researchers compare the changes in the minimum wage over
time with the changes in teenage employment. Although there is some debate
about how much the minimum wage affects employment, the typical study nds
that a 10 percent increase in the minimum wage depresses teenage employment
between 1 and 3 percent. In interpreting this estimate, note that a 10 percent
increase in the minimum wage does not raise the average wage of teenagers
by 10 percent. A change in the law does not directly affect those teenagers who
are already paid well above the minimum, and enforcement of minimum-wage
laws is not perfect. Thus, the estimated drop in employment of 1 to 3 percent is
signi cant
In addition to altering the quantity of labor demanded, the miniman wage
alters the quantity supplied. Because the minimum wage raises the wage that
teenagers can earn, it increases the number of teenagers who choose to look for
jobs. Studies have found that a higher minimum wage in uences which teenagers
are employed. When the minimum wage rises, some teenagers who are still
attending high school choose to drop out and take jobs. These new dropouts
displace other teenagers who had already dropped out of school and who now
become unemployed
The minimum wage is a frequent topic of debate. Economists are about evenly
divided on the issue. In a 2006 survey of PhD. economists, 47 percent favored
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eliminating the minimum wage, while 14 percent would maintain it at its current
level and 38 percent would increase it.
Advocates of the minimum wage view the policy as one way to raise the
income of the working poor. They correctly point out that workers who earn the
minimum wage can afford only a meager standard of living. In 2009, for instance,
when the minimum wage was $7.25 per hour, two adults working 40 hours a
week for every week of the year at minimum-wage jobs had a total annual income
of only $30,160, which was less than two-thirds of the median family income in
the United States. Many advocates of the minimum wage admit that it has some
adverse effects, including unemployment, but they believe that these effects are
small and that, all things considered, a higher minimum wage makes the poor
better off.
Opponents of the minimum wage contend that it is not the best way to combat
poverty. They note that a high minimum wage causes unemployment, encourages teenagers to drop out of school, and prevents some unskilled workers from
getting the on-the-job training they need. Moreover, opponents of the minimum
wage point out that it is a poorly targeted policy. Not all minimum-wage workers
are heads ofhouseholds trying to help their families escape poverty. In fact, fewer
than a third of minimum-wage earners are in families with incomes below the
poverty line. Many are teenagers from middle-class homes working at part-time
jobs for extra spending money.
I
Evaluating Price Controls
One of the Tm Principles ofEconomics discussed in Chapter 1 is that markets are
usually a good way to organize economic activity. This principle explains why
economists usually oppose price ceilings and price oors. To economists, prices
are not the outcome of some haphazard process. Prices, they contend, are the
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119
Your expectations about the fuhire may affect your demand for
a good or service today. If you expect to eam a higher income next month, you
may choose to save less now and spend more of your current income buying ice
cream. If you expect the price of ice cream to fall tomorrow, you may be less willing to buy an ice-cream cone at today’s price.
Expectations
Number of Buyers In addition to the preceding factors, which influence the
behavior of individual buyers, market demand depends on the number of these
buyers. If Peter were to join Catherine and Nicholas as another consumer of ice
cream, the quantity demanded in the market would be higher at every price, and
market demand would increase.
The demand curve shows what happens to the quantity demanded of
that in uence
curve shifts. Table
1 lists the variables
that in uence how much consumers choose to buy of a good.
If you have trouble remembering whether you need to shift or move along the
demand curve, it helps to recall a lesson from the appendix to Chapter 2. A curve
shifts when there is a change in a relevant variable that is not measured on either
axis. Because the price is on the vertical axis, a change in price represents a movement along the demand curve. By contrast, income, the prices of related goods,
tastes, expectations, and the number of buyers are not measured on either axis, so
a change in one of these variables shifts the demand curve.
Summary
Two Ways to Reduce the Quantity
g
of Smoking Demanded
g
Public policymakers often want to reduce the amount that people smoke because
of smoking’s adverse health effects. There are two ways that policy can attempt
to achieve this goal.
Oneway to reduce smoking is to shift the demand curve forcigarettes and other
tobacco products. Public service announcements, mandatory health warnings on
cigarette packages, and the prohibition of cigarette advertising on television are
all policies aimed at reducing the quantity of cigarettes demanded at any given
price. 1f successful, these policies shift the demand curve for cigarettes to the left,
as in panel (a) of Figure 4.
Price of the good itself
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Shms the demand curve
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Shifts the demand curve
Number of buyers
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Thls table Ilsts the varlables that
affect how much consumers choose
to buy of any good. Notice the
specia| r°|e that the price of the
good plays: A change in the good’s
price represents a movement
along the demand curve, whereas
a change in one ofthe other
variables shifts the demand curve.
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Prices of related goods
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a good when its price varies, holding constant all the other variables
buyers. When one of these other variables changes, the demand
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4
Shifts i” the Demand
curve versus Movemen“
a|°ng the Demand curve
If warnings on cigarette packages convince smokers to smoke less, the demand curve
for cigarettes shifts to the left. In panel (a), the demand curve shifts from D, to D2. At
a price of $2.00 per pack, the quantity demanded falls from 20 to 10 cigarettes per
day, as re ected by the shift from point A to point B. By contrast, if a tax raises the
price of cigarettes, the demand curve does not shift. Instead, we observe a movement
to a different point on the demand curve. ln panel (b), when the price rises from $2.00
to $4.00, the quantity demanded falls from 20 to 12 cigarettes per day, as re ected by
the movement from point A to point C.
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Figure
(a) A Shift in the Demand Curve
Price
of
A P°ii
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