Answers to Price Controls handout

1. Cheese anyone????

a. Place price floor above the equilibrium price, illustrating that QD falls, QS rises, and a surplus results.

b. Yes, because while the price went up, cheese farmers lost customers, which could ultimately lead to less revenue overall.

c. Cheese farmers benefit because now they are able to sell all of the cheese at QS at the higher price without any surplus left over. ┬áThe government loses (what’s the government going to do with all that cheese??!!)

2. Frisbees!!!

a. $8 and 6 million Frisbees

b. $10, but only 2 million Frisbees will be sold at that price. (There will be a surplus of 10 million Frisbees.)

c. A price ceiling instituted at $9 is above the equilibrium price of $8; therefore, the price ceiling is non-binding or ineffective.  Thus, the market returns to the equilbrium price of $8 and equilibrium quantity of 6 million Frisbees.

3. Minimum wage

Employment will decrease (QD falls even more), and unemployment rises (surplus of workers gets even bigger).

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Answers to Study Review Guide

Answers to front page:

No response because $700 is above the equilibrium price.

Quantity demanded will rise to 55, quantity supplied will fall to 40, and the result is a shortage of 15 bicycles.

No, some are worse off because of the shortage (unable to purchase a bicycle at the lower price).

Quantity demanded will fall to 40, quantity supplied will rise to 70, and the result is a surplus of 30 bicycles.

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

Shortage, price falls, quantity demanded rises, quantity supplied falls.

Shortage, sellers are worse off because of the price fall, some buyers are worse off due to the shortage.

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

Surplus, price rises, quantity demanded falls, quantity supplied rises.

Answers to True/False

False (a price ceiling set above the market equilibrium price has no impact on the market)

False (shortage)

True

False (some teenagers cannot find a job due to unemployment caused by the price floor)

False (only if effective Pf > Pe)

Answers to 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