Answers to Study Guide and Price Controls Handout

Study Guide Answers:

1. None because above the equilibrium price.

2. QD increases to 55, QS decreases to 40, resulting in a shortage of 15 bikes.

3. No because of the shortage.

4. QD falls to 40, QS rises to 70, resulting in a surplus of 30 bikes.

5. No impact because equilibrium price is already obeying the law.

6. Shortage, price falls, QD rises, QS falls.

7. Shortage, sellers worse off because the price is lower, some buyers are worse off because they can’t buy the good due to the shortage.

8. No impact because equilibrium price is already obeying the law.

9. Surplus, price rises, QD falls, QS rises.

True/False.

1. False, no impact.

2. False, a shortage.

3. True

4. False, some teens won’t be able to find a job due to the surplus of available workers.

5. False, only if the price floor is set above the equilibrium price.

Multiple Choice

1. B

2. A

3. D

4. B

5. C

6. C

7. E

8. A

9. C

10. E

11. D

12. A

Answers to Price Controls Handout

1. Market for cheese:

a. Binding price floor: set above equilibrium price.  Price rises, quantity of cheese sold falls.  Surplus.

b. Yes because they lost customers, so even though price is higher, they’ve lost too many buyers to sustain their revenue.

c. Farmers benefit.  Government loses.

2. Market for Frisbees:

a. $8, 6 million Frisbees

b. $10, 2 million Frisbees sold

c. Price ceiling of $9 is above the market equilibrium price of $8; therefore, we return to equilibrium because the new price ceiling is ineffective/non-binding.  6 million Frisbees will be sold at $8 each.

3. Market for labor and minimum wage:

a. Employment will decrease, wages of employed workers will increase.

b. Unemployment will increase (surplus of labor).

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