EC120 Lecture Notes - Lecture 6: Economic Equilibrium, Price Ceiling, Price Floor

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13 Apr 2016

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Price controls: price ceiling: a legal maximum on the price of a good or service. Rent control: price loor: a legal minimum on the price of a good or service. Taxes: the government can make buyers or sellers pay a speciic amount on each unit bought/sold. The supply/demand model will show how each policy afects the market equilibrium: the price buyers pay, the price sellers receive, and equilibrium quanity. Apartments for rent with iniial equilibrium of and 300 people of demand. Rent control policy #1: max. rent is /month. This is a non-binding ceiling: a price ceiling above the equilibrium price. Max. price is greater than market equilibrium price. Rent control policy #2: max. rent is /month. This is a binding price ceiling: a price ceiling below the equilibrium price. Max. price is less than market equilibrium price. Shortage: 150 people (400 250 = 150) If demand supply were more elasic, shortage would be larger: shortages and raioning.

Related Questions

1. The language of price controls

Suppose that, in a competitive market without government regulations, the equilibrium price of gasoline is $3.00 per gallon.

Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding.

Statement	Price Control	Binding or Not
Due to new regulations, gas stations that would like to pay better wages in order to hire more workers are prohibited from doing so.	price ceiling/price floor	binding/non
The government has instituted a legal minimum price of $2.70 per gallon for gasoline.price ceiling/price floor
The government prohibits gas stations from selling gasoline for more than $3.40 per gallon.price ceiling/price floor

A recent study found that the demand and supply schedules for flying disks are as follows:

Price	Quantity Demanded	Quantity Supplied
(Dollars per disk)	(Millions of disks)	(Millions of disks)
11	1	15
10	2	12
9	4	9
8	6	6
7	8	3
6	10	1

Complete the first row of the following table by indicating the equilibrium price and the equilibrium quantity of flying disks in the absence of any price controls.

Scenario	Market Price	Market Quantity	Binding or Not Binding
Scenario	(Dollars per disk)	(Millions of disks)	Binding or Not Binding
No Price Control			N/A
Price Floor
Price Ceiling

Flying disk manufacturers persuade the government that flying disk production improves scientists' understanding of aerodynamics and thus is important for national security. A concerned Congress votes to impose a price floor $2 above the equilibrium price.

Complete the second row of the previous table by indicating the new price and quantity of flying disks when Congress imposes a price floor $2 above the equilibrium price. Then indicate whether the price floor is binding or not binding.

Irate college students march on Washington and demand a reduction in the price of flying disks. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $3 below the former price floor.

Complete the final row of the previous table by indicating the new price and quantity of flying disks when Congress imposes a price ceiling $3 below the former price floor. Then indicate whether the price ceiling is binding or not binding.

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QUESTION 38

You are the president of the United States. In an attempt to make gasoline prices cheaper, you have imposed a binding price ceiling on gas. What would you expect your critics to say?

	a.	The binding price ceiling will cause firms to minimize their spending on the research and development of alternatives to gasoline.
	b.	The binding price ceiling will discourage individuals from using their personal automobile to commute to work or school.
	c.	The binding price ceiling will increase the likelihood that customers obtain needed gasoline on the black market.
	d.	The binding price ceiling will encourage oil companies to deplete the resource too quickly.
	e.	The binding price ceiling will cause firms to produce only gasoline of the highest quality.

1.05000 points

QUESTION 39

If a firm's long-run average total costs increase as it increases its scale of production, the firm is experiencing:

	a.	increasing returns from specialization.
	b.	diseconomies of scale.
	c.	economies of scale.
	d.	constant returns to scale.
	e.	diminishing marginal product.

1.05000 points

QUESTION 40

A(n) __________ in the elasticity of supply or demand in a market for a good that is taxed would tend to __________ tax revenue from that tax.

	a.	increase; increase
	b.	increase; have no effect on
	c.	decrease; have no effect on
	d.	decrease; decrease
	e.	increase; decrease

1.05000 points

QUESTION 41

The costs of a market activity paid for by an individual engaged in the market activity are:

	a.	external costs.
	b.	social costs.
	c.	common costs.
	d.	free-rider costs.
	e.	internal costs.

1.05000 points

QUESTION 42

Assume that the price of rubber increased at the same time that Michael Jordan, arguably the best NBA basketball player of all time, became famous. What do you expect to happen to the equilibrium price and equilibrium quantity of the basketball shoes that are promoted by Michael Jordan?

	a.	Equilibrium price will go down and equilibrium quantity will be indeterminate.
	b.	Equilibrium price will go up and equilibrium quantity will go down.
	c.	Equilibrium price will go up and equilibrium quantity will be indeterminate.
	d.	Equilibrium price will go down and equilibrium quantity will go up.
	e.	Equilibrium price will go up and equilibrium quantity will go up.

1.05000 points

QUESTION 43

The minimum wage law is an example of a:

	a.	price floor.
	b.	law that sets the minimum number of hours that an employee must work for wages during the week.
	c.	law that allows individual employers and employees to make free decisions.
	d.	law that requires quantity demanded to equal quantity supplied.
	e.	price ceiling.

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EC120 Lecture Notes - Lecture 6: Economic Equilibrium, Price Ceiling, Price Floor

EC120 Full Course Notes

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