ECON10004: INTRODUCTORY MICROECONOMICS

TASKS FOR TUTORIAL 5

(Week beginning August 21)

TASK 1

In the Australian labour market there is demand for and supply of low-skill labour:
QD = 10,000 – 500w
QS = 500w
where QD = quantity of hours of low-skill labour demanded by Australian firms, QS =
quantity of hours of labour supplied by low-skill Australian workers, and w = wage rate
per hour of low-skill labour.

Assume that the Australian labour market for low-skill labour is perfectly competitive.

a) What will be the equilibrium wage rate and total hours of low-skill labour in this
market? What is the low skill wage bill and wage income?

b) Suppose now that Australian businesses can ‘import’ any quantity of low-skill labour
they want via a special government visa scheme for low-skill immigrants. The cost of
each hour of ‘imported’ labour will be $5 per hour.

What will be the effect of the scope to ‘import’ low-skill labour on:
i) The equilibrium wage rate for low-skill labour in Australia?
ii) The total hours of low-skill labour supplied by Australian workers?
iii) Total hours of low-skill labour demanded by Australian firms?
iv) Quantity of low-skill labour imported?

c) Using a diagram and table (like the one below), show the effect of introducing the
scope to ‘import’ low-skill labour on:
i) Surplus for Australian low-skill workers;
ii) Surplus for Australian firms; and
iii) Total surplus to Australian society.

Autarky With international Change

trade
(i) Surplus to
Australian workers
(ii) Surplus to
Australian firms

(iii) Total surplus

d) Show how the market outcome and surplus to Australian low-skill workers and firms
would be affected (compared to the outcome with no restrictions on immigration) by
the government imposing a tax of $2.50 per hour of low-skill labour that is ‘imported’
by an Australian firm.
International trade With tax on Change
imported workers
(i) Surplus to
Australian workers
(ii) Surplus to
Australian firms
(iii) Government
revenue

(iv) Total surplus

TASK 2
Assume that the market for gas in OzLand is perfectly competitive. OzLand is a net
exporter of gas (that is, it exports gas to the rest of the world).

a) The world price for gas has recently decreased by $100 per unit, from WP1 to WP2,
because producers in RusLand have found a new rich source of gas. Suppose OzLand
continues to be an exporter of gas after the change. Explain how this decrease in the
world price will affect the equilibrium outcome in the market for gas in OzLand. How
will the well-being of OzLand consumers of gas and OzLand suppliers of gas be
affected? What is the effect on total surplus in the market for gas in OzLand?

b) The government of OzLand announces that, in order to compensate for this decrease
in the world price of gas, the government will introduce an export subsidy per unit of
gas exported by OzLand suppliers. The per-unit export subsidy amount will be exactly
the same as the amount by which the world price for gas has decreased. That is, the
government will subsidise all OzLand suppliers by $100 per unit of production that is
exported to the international market.

Aaron, the treasurer of OzLand, says: “This new subsidy will exactly offset the effect
of the decrease in world price. Hence, well-being in OzLand will exactly be the same
as before the world price decrease.” Is Aaron correct? Explain by calculating the change
in consumer surplus, producer surplus, and total surplus. Assume that after the
implementation of the export subsidy, domestic consumers in OzLand pay the subsidy-
inclusive price in OzLand. That is, they are not able to buy internationally at the lower
world price, WP2.