Author Question: Suppose your neighbor owns a restaurant and boasts that he is able to turn a handsome accounting ... (Read 37 times)

jake · **on:** Jun 29, 2018

Suppose your neighbor owns a restaurant and boasts that he is able to turn a handsome accounting profit because of his low labor costs. He attributes this to the fact that he uses his sons and daughters as cooks and waiters.

His point is that he offers them below-market wages. How would you respond to your neighbor's statement? What would you tell him to expect as his children continue to work for him while they are in college and beyond?

Question 2

The rash of hurricanes that pelted the Gulf Coast in 2005 resulted in a large decline in gasoline production as many offshore rigs were shut down and many refineries were taken off line while waiting out the hurricane.

The decrease in supplies of gasoline led to a run up in prices. Many voters clamored for relief by calling on their congressman and senators to enact temporary price controls. Analyze the impact on the gasoline market that would have transpired had politicians actually headed the calls by voters to impose price controls on gasoline.

kingfahad97 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Your neighbor might believe that he has low labor costs because of the low wages he is paying them. However, he must think carefully about their opportunity cost. If his children could earn higher wages at a job outside the restaurant than the extra-added profitability that they bring to the firm then their true cost must be taken into account. As his children go through college their opportunity cost will rise since they will become more valuable in the labor market.

Answer to Question 2

If temporary controls had been put into effect the likely impact on the market would have been to create a shortage of gasoline. Put simply, this would have resulted in long lines at gas stations and other means of rationing gas as customers attempt to look for ways around the price control.