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.  The 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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