ECON 200 Chapter 6: Chapter 6 notes.docx
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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 |
---|---|---|---|
(Dollars per disk) | (Millions of disks) | ||
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.