Microecon Chapter 6 Questions

Suppose there's a price ceiling set at $4. Calculate deadweight loss

(page 157) Area of deadweight loss 0.5(6-2)(16-4)= $24

A price ceiling that is non-binding: (3 things)

1. is above equilibrium quantity 2. no shortage 3. no deadweight loss

A long-standing price ceiling on housing in your city is in effect. When the population decreases and therefore demand for housing decreases, what will the decrease in demand do to the efficiency of the price ceiling?

A binding price ceiling keeps the price below the equilibrium quantity and creates both a shortage and a deadweight loss. If demand decreases, equilibrium decreases. If demand drops low enough, the price ceiling could become non-binding to the point there will be no shortage or deadweight loss.

There is a price ceiling placed on bread. Many families still cannot afford the bread. Why?

A price ceiling is a maximum legal price at which a good can be sold. A binding price ceiling causes a shortage because consumers will demand more than producers supply and therefore some families will be not be able to purchase bread at all.

There is a price floor for spinach. Why might this decrease revenues for spinach farmers?

A price floor is a minimum legal price at which a good can be sold. A price floor sets the minimum price above the equilibrium price, thus creating excess supply while demand stays the same. Because the price for spinach decreases quantity demand due to higher prices, demand for spinach is elastic and revenue decreases.

What are the potential benefits of subsidizing agricultural products? What are the costs?

A subsidy is a payment that the government makes to buyers or sellers of a good for each unit that is sold. Subsidies increase the size of a market, encouraging the consumption and production of the goods and producing a surplus of both. Equilibrium quantity will increase. The expense will fall on the taxpayers.

Halibut is considered a close substitute for cod. What effect will overfishing cod have on the price of cod? What effect will it have on the market for halibut?

Due to the reduced supply of cod, the price of cod will increase. If the price of cod increases, demand and price for halibut increases.

Would it effect the consumer is there was a tax on their cigarettes instead of taxing the store itself?

If the sellers were taxed instead of the consumers, the price that consumers pay would remain exactly the same.

Suppose the government institutes a price floor on the sale of Brussel sprouts, at $8 a bushel. Demand is given by P=9-Q and supply by P=2Q. What will be the price and quantity of Brussels sold at market equilibrium?

P=9-Q = 2Q; 9=3Q; Q=3 thousand bushels; P=$6

Suppose government officials are thinking of capping the price of gasoline below its current price. What will happen?

Quantity demanded for gasoline will increase and long lines will develop at gas stations. It does not guarantee drivers will purchase more gasoline or oil companies will work to increase their pumping capacity.

Suppose the government institutes a price floor on the sale of Brussel sprouts, at $8 a bushel. Demand is given by P=9-Q and supply by P=2Q. What will be the excess supply of sprouts produced with the price floor?

Quantity supplied (4) - quantity demanded (1) = 3 thousand bushels.

Suppose the government institutes a price floor on the sale of Brussel sprouts, at $8 a bushel. Demand is given by P=9-Q and supply by P=2Q. What will be the price and quantity sold with the price floor?

The price floor is above equilibrium price, so it is binding. The quantity demanded price will be P=$8. P=9-Q = 8; Q=1. At $8, quantity supplied is 4 thousand but quantity demanded is only 1. Therefore quantity sold is 1 thousand bushels.

Why might a subsidy be considered inefficient?

The subsidy encourages the market to move beyond the point where willingness to pay is greater than or equal to willingness to sell. If we think the market equilibrium quantity is too low and we want more trades to occur, the cost of the subsidy might be worth it, if not, the subsidy is inefficient.

Suppose Colombia maintains a price floor for coffee beans. What will happen to the size of the deadweight loss if the price floor encourages new growers to enter the market and produce coffee?

The supply curve would shift to the right and equilibrium price would fall. Deadweight loss would increase.

Consider a tax on cigarettes. Do you expect the tax incidence to fall more heavily on buyers or sellers of cigarettes?

The tax incidence will fall more heavily on the side of the market that is less elastic. Demand could be less elastic than supply because smoking is addictive and consumers may have a harder time reducing consumption than producers would have reducing supply.

Total surplus is the sum of:

consumer surplus, producer surplus, and tax revenue