Friday, October 29th, 2010

Supply, Demand, and Price Controls Study Guide

Use the following supply and demand schedules for bicycles to answer the questions below.

Price                            Quantity Demanded                              Quantity Supplied

300                                          60                                                        30

400                                          55                                                        40

500                                          50                                                        50

600                                          45                                                        60

700                                          40                                                        70

800                                          35                                                        80

In response to lobbying by the Bicycle Riders Association, Congress places a price ceiling of $700 on bicycles.  What effect will this have on the market for bicycles?  Why?

No effect because above the equilibrium price.

In response to lobbying by the Bicycle Riders Association, Congress places a price ceiling of $400 on bicycles.  Use the information provided above to plot the supply and demand curves for bicycles.  Impose the price ceiling.  What is the result of a price ceiling of $400 on bicycles?

$400 price and a shortage.  QD = 55 and QS = 40.  Shortage of 15 bicycles.

Does a price ceiling of $400 on bicycles make all bicycle buyers better off?  Why or why not?

It makes some bicycle buyers better off if they are able to buy a bike at the cheaper price; however, some bicyclists won’t be able to buy a bike due to the shortage.  These buyers are worse off.

Suppose instead Congress imposes a price floor on bicycles of $700.  Use the information provided above to plot the supply and demand curves for bicycles.  Impose the $700 price floor.  What is the result of the $700 price floor?

$700 price and surplus.  QD = 40 and QS = 70.  Surplus of 30 bicycles.

What is the impact on the price and quantity in a market if a price ceiling is set above the equilibrium price?  Why?

No impact (non-binding) because market prices and quantities will still prevail.

What is the impact on the price and quantity in a market if a price ceiling is set below the equilibrium price?

The price will fall, and a shortage will exist.

What are some of the problems created by a binding price ceiling?

Shortages, sellers won’t want to produce as much because the price is lower, and buyers won’t be able to buy as much as they would like at the lower price.

What is the impact on the price and quantity in a market if a price floor is set below the equilibrium price?  Why?

No impact (non-binding) because market prices and quantities will still prevail.

What is the impact on the price and quantity in a market if a price floor is set above the equilibrium price?

Surpluses.  Sellers won’t be able to sell as much as they would like at the higher prices, and buyers won’t be able to buy as much at the higher prices.


If the equilibrium price of gasoline is $1.00 per gallon and the government places a price ceiling on gasoline of $1.50 per gallon, the result will be a shortage of gasoline.   False

A price ceiling set below the equilibrium price causes a surplus.  False

A price floor set above the equilibrium price is a binding constraint.  True

The minimum wage helps all teenagers because they receive higher wages than they would otherwise.  False

A price floor in a market always creates a surplus in that market.  False

Multiple Choice Questions.

1.)    For a price ceiling to be a binding constraint on the market, the government must set it

  1. Above the equilibrium price.
  2. Below the equilibrium price.
  3. Precisely at the equilibrium price.
  4. At any price because all price ceilings are binding constraints.

Answer: B

2.)    A binding price ceiling creates

  1. A shortage.
  2. A surplus.
  3. An equilibrium.
  4. A shortage or a surplus depending on whether the price ceiling is set above or below the equilibrium price.

Answer: A

3.)    Suppose the equilibrium price for apartments is $500 per month and the government imposes rent controls of $250.  Which of the following is unlikely to occur as a result of the rent controls?

  1. There will be a shortage of housing.
  2. Landlords may discriminate among apartment renters.
  3. Landlords may be offered bribes to rent apartments.
  4. The quality of apartments will improve.
  5. There may be long lines of buyers waiting for apartments.

Answer: D

4.)    A price floor

  1. Sets a legal maximum on the price at which a good can be sold.
  2. Sets a legal minimum on the price at which a good can be sold.
  3. Always determines the price at which a good must be sold.
  4. Is not a binding constraint if it is set above the equilibrium price.

Answer: B

5.)    Which side of the market is more likely to lobby government for a price floor?

  1. Neither buyers or sellers desire a price floor.
  2. Both buyers and sellers desire a price floor.
  3. The sellers.
  4. The buyers.

Answer: C

6.)    Which of the following is an example of a price floor?

  1. Rent controls
  2. Restricting gasoline prices to $1.00 per gallon when the equilibrium price is $1.50 per gallon.
  3. The minimum wage
  4. All of the above are price floors.

Answer: C



                       $1.00                                                                                                                                         $.80                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            900 1000 1100              Quantity of gasoline

                              (millions of gallons per week)

7.)    The graph above shows the supply and demand curves for gasoline.  Which of the following will occur if the government establishes a price ceiling of $1.20 per gallon?

  1. A shortage of 900 million gallons
  2. A shortage of 200 million gallons
  3. A shortage of 100 million gallons
  4. A surplus of 100 million gallons
  5. Neither a surplus nor a shortage

Answer: E

8.)    Which of the following is true of a price floor?

  1. The intention of the government in creating the price floor is to assist the producers of the good.
  2. To have an impact in the market for the good, the price floor should be set below the existing market price of the good.
  3. An effective price floor will increase the quantity demanded of the good.
  4. The price floor would tend to create a shortage of the good in the market.
  5. The creation of the price floor would not change the quantity supplied of the good if the supply curve were upward-sloping to the right.

Answer: A

9.)    If the minimum wage for teenagers increased to a rate higher than their market equilibrium wage, what would be the effect on their wage and employment?

  1. Wage would increase, there would be no effect on employment.
  2. Wage would increase, and employment would increase.
  3. Wage would increase, and employment would decrease.
  4. Wage would decrease, and employment would increase.
  5. Wage would decrease, and employment would decrease.

Answer: C

10.)                        The market equilibrium price of home heating oil is $1.50 per gallon.  If a price ceiling of $1.00 per gallon is imposed, which of the following will occur in the market for home heating oil?

  1. Quantity supplied will increase.
  2. Quantity demanded will increase.
  3. Quantity supplied will decrease.
  4. Quantity demanded will decrease.


  1. II only
  2. I and II only
  3. I and IV only
  4. III and IV only
  5. II and III only

Answer: E

11.)                        An effective price floor introduced in the market for rice will result in

  1. A decrease in the price of rice and an increase in the quantity of rice sold.
  2. A decrease in the price of rice and a decrease in the quantity of rice sold.
  3. A decrease in the price of rice and an excess demand for rice.
  4. An increase in the price of rice and an excess supply of rice.
  5. An increase in the price of rice and an excess demand for rice.

Answer: D

12.)                        Suppose than an effective minimum wage is imposed in a certain labor market above the equilibrium wage.  If labor supply in that market subsequently increases, which of the following will occur?

  1. Unemployment in that market will increase.
  2. Quantity of labor supplied will decrease.
  3. Quantity of labor demanded will increase.
  4. Market demand will increase.
  5. The market wage will increase.

Answer: A


Friday, October 8th, 2010

Document 1: An Account of a Visitor to Lowell (1836)

The [girls] work thirteen hours a day in the summer time, and from daylight to dark in the winter. At half past four in the morning the factory bell rings, and at five the girls must be in the mills. A clerk, placed as a watch, observes those who are a few minutes behind the time, and effectual means are taken to stimulate to punctuality. This is the morning commencement of the industrial discipline (should we not rather say industrial tyranny?) which is established in these associations of this moral and Christian community.

At seven the girls are allowed thirty minutes for breakfast, and at noon thirty minutes more for dinner… But within this time they must hurry to their boardinghouses and return to the factory, and that through the hot sun or the rain or the cold. A meal eaten under such circumstances must be quite unfavorable to digestion and health, as any medical man will inform us. At seven o’clock in the evening the factory bell sounds the close of the day’s work.

  Thus thirteen hours per day of close attention and monotonous labor are exacted from the young women in these manufactories. . . . So fatigued–we should say, exhausted and worn out…are numbers of girls that they go to bed soon after their evening meal, and endeavor by a comparatively long sleep to resuscitate their weakened frames for the toil of the coming day.

…Enter with us into the large rooms, when the looms are at work. The largest that we saw is in the Amoskeag Mills at Manchester. . . . The din and clatter of these five hundred looms, under full operation, struck us on first entering as something frightful and infernal, for it seemed such an atrocious violation of one of the faculties of the human soul, the sense of hearing. After a while we became somewhat inured to it, and by speaking quite close to the ear of an operative and quite loud, we could hold a conversation…

  The girls attend upon an average three looms; many attend four, but this requires a very active person, and the most unremitting care. However, a great many do it. Attention to two is as much as should be demanded of an operative. This gives us some idea of the application required during the thirteen hours of daily labor. The atmosphere of such a room cannot of course be pure; on the contrary, it is charged with cotton filaments and dust, which, we are told, are very injurious to the lungs.

  On entering the room, although the day was warm, we remarked that the windows were down. We asked the reason, and a young woman answered very naïvely…, that “when the wind blew, the threads did not work well.” After we had been in the room for fifteen minutes…, we found ourselves…in quite a perspiration, produced by a certain moisture which we observed in the air, as well as by the heat. . . .

  The young women sleep upon an average six in a room, three beds to a room. There is no privacy, no retirement, here. It is almost impossible to read or write alone, as the parlor is full and so many sleep in the same chamber…So live and toil the young women of our country in the boardinghouses and manufactories which the rich and influential of our land have built for them.

Document 2: Emeline Larcom Letters

Document 3: The “Utopian” Lowell Looms (1844)

Around 70 young female operatives who worked in the Lowell mills published a journal called The Lowell Offering. The extent to which the owners of the mills controlled the content of the journal is uncertain, though they probably had some censorship power over it. The following selection was originally printed in the Lowell Offering in 1844.

Miss S: I am very happy to see you this evening, Miss Bartlett. Now do tell me if you still persist in your resolution to return to your factory employment?

Miss B: I do. I have no objection, neither have I heard any sufficiently strong to deter me.

Miss S: The idea that it is degrading, in the opinion of many, would be objection enough for me without taking into account its real tendency to promote ignorance and vice.

Miss B: By whom is factory labor considered degrading? It is by those who believe all labor degrading–by those who contemptuously speak of the farmer, the mechanic, the printer, the seamstress, and all who are obliged to toil as belonging to the lower orders–by those who seem to think the condition of labor excludes all the capacities of the mind and the virtues of humanity. They forget that circumstances, over which they have little or no control, place them above the necessity of labor; and that circumstances may yet compel them to engage in that at which they now scoff and spurn.

Miss S: There are objections to factory labor, which serve to render it degrading–objections which cannot be urged against any other kind of female employment. For instance, to be called and to be dismissed by the ringing of a bell savors of compulsion and slavery, and cannot cease to produce mortification without having been destructive to self-respect.

Miss B: In almost all kinds of employment it is necessary to keep regular established hours: more particularly so where there are so many connected as in the factories. Because we are reminded of those hours by the ringing of a bell, it is no argument against our employment, any more than it would be against going to church or to school. Our engagements are voluntarily entered into with our employers, with the understanding that they may be dissolved at our pleasure. However derogatory to our dignity and liberty you may consider factory labor, there is not a tinge of slavery existing in it, unless there be in every kind of labor that is urged upon us by the force of circumstances.

 Miss S: Objections have been brought up against the boardinghouses, and, I think, with much plausibility. The large number of females who are there thrown together are, unavoidably, intimately connected with each other. It cannot be denied that some, guilty of immoralities, find their way into the factories and boardinghouses. The example and influence of such must be pernicious, and terminate in the increase of vice.

Miss B: It is true that the example and influence of immorality, wherever it exists, cannot be otherwise than evil. We know, also, that some exceptionable characters occasionally find a place among those employed in factories. We know it from the fact that dismissals do, now and then, occur as the consequence. But, my dear Miss S, did you ever know or hear of a class of people who could boast of perfection? among whom wrong of any description was never known?

Miss S: O, no! And, as I am no perfectionist, I never expect to know one.

Miss B: Then, if in one case the guilt of a few has not corrupted the whole, why should it in the other? Living in a factory boardinghouse, and working in a factory, changes not “human nature”: it is susceptible of good, and also of evil, there, as it is elsewhere.

Miss S: You will not acknowledge that factory labor is degrading, or that it is productive of vice, but you must own that it fosters ignorance. When there are so many hours out of each day devoted to labor, there can be no time for study and improvement.

Miss B: It is true that too large a portion of our time is confined to labor. But, first, let me remark that this is an objection which cannot be said to exist only in factory labor. . . . We have abundant proof that unremitted toil is not always derogatory to improvement. A factory girl’s work is neither hard nor complicated. She can go on with perfect regularity in her duties while her mind may be actively employed on any other subject. There can be no better place for reflection, when there must be toil, than the factory. The patronage which newspapers and periodicals find in our city, our well-worn libraries, evening schools, crowded churches and sabbath schools, prove that factory operatives find leisure to use the means of improvement both in mind and heart.

 Document 4: Mary Paul Letters

Mary Paul was one of thousands of Lowell mill “girls.” She grew up in northern Vermont, one of four children born to Bela and Marry Briggs Paul. She began her working life as a domestic in Bridgewater, Vermont, but in 1845 decided to try her luck in Lowell. She worked in the mills from 1845 through 1848.

Saturday Sept. 13th 1845 [Sent from Woodstrock, Vermont]

Dear Father

I want you to consent to let me go to Lowell if you can. I think it would be much better for me than to stay about here. I could earn more to begin with than I can any where about here. I am in need of clothes which I cannot get if I stay about here and for that reason I want to go to Lowell or some other place. Mercy Jane Griffith is going to start in four or five weeks. Aunt Miller and Aunt Sarah think it would be a good chance for me to go if you would consent-which I want you to do if possible. I want to see you and talk with you about it.


Lowell Dec 21st 1845
Dear Father

I received your letter on Thursday the 14th with much pleasure. I am well. My life and health are spared while others are cut off. Last Thursday one girl fell down and broke her neck which caused instant death. She was going in or coming out of the mill and slipped down it being very icy. The same day a man was killed by the [railroad] cars. Another had nearly all of his ribs broken. Another was nearly killed by falling down and having a bale of cotton fall on him. Last Tuesday we were paid. In all I had six dollars and sixty cents paid $4.68 for board. With the rest I got me a pair of rubbers and a pair of 50.cts shoes. Next payment I am to have a dollar a week beside my board. Perhaps you would like something about our regulations about going in and coming out of the mill. At 5 o’clock in the morning the bell rings for the folks to get up and get breakfast. At half past six it rings for the girls to get up and at seven they are called into the mill. At half past 12 we have dinner are called back again at one and stay till half past seven. I get along very well with my work. I can doff as fast as any girl in our room. I think I shall have frames before long. The usual time allowed for learning is six months but I think I shall have frames before I have been in three as I get along so fast. I think that the factory is the best place for me and if any girl wants employment I advise them to come to Lowell. I have little time to devote to writing that I cannot write all I want to. There are half a dozen letters which I ought to write to day but I have not time. Tell Harriet I send my love to her and all of the girls. Give my love to Mrs. Clement.

This from
Mary S Paul

Document 5: “Starting for Lowell.”

During the 1820s, large scale production of fabric centered in New England. Perhaps the best known of such cotton mill towns was Lowell, Massachusetts. The Lowell mills mechanized each stage of cloth production, and most mill workers were young, single women from rural New England families struggling to make ends meet. This illustration from T. S. Arthur’s reform tract Illustrated Temperance Tales (1850) presented a young woman leaving her farm family to work in a cotton mill. This picture was accurate in showing that New England farm families often had to rely on income from factory labor. But reformers blamed economic hardship on personal weaknesses—in the case of Arthur’s story, the father’s alcoholism.

Document 6: The Spirit of Discontent:

Document 7: “Song of the Spinners” Lyrics

Monday, October 4th, 2010

Test tomorrow on the first unit!!!

Answer key to the practice problem on Argentina and Peru:

1. Opp cost of beef (forego fruit) for Argentina: 1/2 fruit

Opp cost of beef (forego fruit) for Peru: 1 fruit

Opp cost of fruit (forego beef) for Argentina: 2 beef

Opp cost of fruit (forego beef) for Peru: 1 beef

Argentina has a comparative advantage in beef.  (Peru has a comparative advantage in fruit.)

2. Peru will export fruit because it exports the item for which it has a comparative advantage, and it has a comparative advantage in fruit.

3. Between 1 to 2 metric tons of beef/month.

4. Argentina has an absolute advantage in beef production because it can produce more beef with the same inputs as Peru.