Check Your Understanding

1. Question

   Suppose that the government places price controls on the market for college professors, imposing a wage that is lower than the market wage. Describe the effect of this policy on the production of college degrees. What sectors of the economy do you think would be adversely affected by this policy? What sectors of the economy might benefit?

   Many college professors will depart for other lines of work if the government imposes a wage that is lower than the market wage. Fewer professors will result in fewer courses taught and therefore fewer college degrees produced. It will adversely affect sectors of the economy that depend directly on colleges, such as the local shopkeepers who sell goods and services to students and faculty, college textbook publishers, and so on. It will also adversely affect firms that use the “output” produced by colleges: new college graduates. Firms that need to hire new employees with college degrees will be hurt as a smaller supply results in a higher market wage for college graduates. Ultimately, the reduced supply of college-educated workers will result in a lower level of human capital in the entire economy relative to what it would have been without the policy. And this will hurt all sectors of the economy that depend on human capital. The sectors of the economy that might benefit are firms that compete with colleges in the hiring of would-be college professors. For example, accounting firms will find it easier to hire people who would otherwise have been professors of accounting, and publishers will find it easier to hire people who would otherwise have been professors of English (easier in the sense that the firms can recruit would-be professors with a lower wage than before). In addition, workers who already have college degrees will benefit; they will command higher wages as the supply of college-educated workers falls.

2. Question

   1. Suppose service industries, such as retailing and banking, experience an increase in demand. These industries use relatively more labor than nonservice industries. Does the demand curve for labor shift to the right, shift to the left, or remain unchanged?

      The demand curve for labor shifts to the right.

   2. Suppose diminishing fish populations off the coast of Maine lead to policies restricting the use of the most productive types of nets in that area. The result is a decrease in the number of fish caught per day by commercial fishers in Maine. The price of fish is unaffected. Does the demand curve for fishers in Maine shift to the right, shift to the left, or remain unchanged?

      The demand curve for fishers shifts to the left.