Problem 1 

Using concepts we have discussed in class, discuss the effect of having a minimum wage. The minimum wage raises workers’ wage above the equilibrium wage. Using a graph and explanation in prose, discuss whether the minimum wage is efficient. Is it fair? Give one argument for why it is fair, and one argument for why it is not. 

Problem 2 

The following is an example of an intertemporal problem of nonrenewable resource depletion.

Assume that the remaining oil supply in the world is S = 50,000 units The energy demand for economic production during each period is 

D = 5,000,000 / P And the annual interest rate is 2%. Round all of your answers to whole numbers.

a) We are interested in three periods: today (period 1), 10 years from now (period 2), and 20 years from now (period 3). Assume that there is a backstop (solar energy) currently available, and its price is $300. Solve for the price of energy and the consumption of energy in the three periods, as well as how much of it in every period comes from oil versus the backstop technology. (Hints: Start by thinking about period 3. Also, think about what prices would have producers be indifferent between selling today and selling in the future?)

b) We will now compare scenario (a) with one where today’s society can forego some consumption in the present to develop alternative technologies for the future. Assume that solar power can be made available for period 2 at a price of $250 only if we choose today to 2 pay the equivalent of 7000 energy units into R&D (assume that energy available for economic production is equal to energy demanded minus the amount put into R&D). Under this scenario, when will we begin to use solar power? Is any time period better off (in terms of energy used for economic production) compared to the same time period in (a)? Will the present generation choose to invest in the R&D, assuming it cares about its own well-being much more than about the future, and that its well-being is directly proportional to its energy used for production?

c) Now assume that the price of solar technology made available by R&D for period 2 is $150. What is the new energy use for the three periods? Will today’s generation invest in the R&D, assuming it cares about its own well-being much more than about the future?

Attachment:- 236945_1_Problem-Set-3.pdf