Microeconomics - Homework 05: Price Controls and Quotas

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Consider the supply and demand schedules. Select the policy or policies that represent binding price controls. -a price ceiling set at $500 -a price ceiling set at $900 -a price floor set at $900 -a price floor set at $500

-a price ceiling set at $500 -a price floor set at $900

Suppose that the average rent for apartments around your school is extremely high, and that you have been asked to come up with a solution. There are two ideas being considered. 1. Create a price ceiling that makes it against the law for landlords to charge more than $1000 per month. 2. Give low‑income renters a voucher of $300 that can be used to help pay for housing costs each month. Organize the items according to which idea they are associated with.

1. Associated with the price ceiling -reduce Landlords incentive to spend money on maintenance -pushes down housing costs for people who are well off and poor alike -results in firms having a reduced incentive to build new housing 2. Associated with the voucher -increase the amount of available housing -can be targeted to help specific subsets of the population -relies upon funding from the government

The accompanying table shows hypothetical demand and supply schedules for milk per year. The U.S. government decides that the incomes of dairy farmers should be maintained at a level that allows the traditional family dairy farm to survive. Thus, it implements a price floor of $1 per pint by buying surplus milk until the market price is $1 per pint. In the diagram, show the deadweight loss from the inefficiently low quantity bought and sold.

Point 1- (650, 1.00) Point 2- (700, .90) Point 3- (650, .80)

The Venezuelan government has imposed a price ceiling on the retail price of roasted coffee beans. The accompanying diagram shows the market for coffee beans. In the absence of price controls, the equilibrium is at point E, with an equilibrium price of PE and an equilibrium quantity bought and sold of QE. Show the consumer and producer surplus before the introduction of the price ceiling.

Refer to photo CS- top shaded region PS- bottom shaded region

In many European countries, high minimum wages have led to high levels of unemployment and underemployment, and to a two-tier labor system. In the formal labor market, workers have good jobs that pay at least the minimum wage. In the informal or black market for labor, workers have poor jobs and receive less than the minimum wage. Assume that the workers who cannot get a job paying at least the minimum wage to move into the informal labor market where there is no minimum wage.

The supply of labor will >increase< in the informal market and the equilibrium wage will >fall<.

The accompanying graph depicts the demand and supply for taxi rides in Gotham City. The mayor decides to ingratiate himself with taxi drivers. He announces a policy in which operating licenses are given to existing taxi drivers; the number of licenses is restricted such that only 10 million rides per year can be given. On the accompanying graph, illustrate the quota. What is the resulting price, quantity transacted, and quota rent? a. Price: b. Quantity: c. Quota rent: $

a. $7 b. 10 million rides per year c. $1 per ride Graph: Match to the info above- Vertical line on 10 million rides per year

In 2014, the U.S. House of Representatives approved a new farm bill establishing the Margin Protection Program (MPP) for dairy producers. Assume that the program has effectively created a price floor for milk at $0.18 per pound. Use the following additional information to answer the following questions: - Without the price floor, the equilibrium price of milk is $0.15 per pound, and the equilibrium quantity is 200 billion pounds of milk. - The supply curve intersects the price axis at $0.05 and the demand curve intersects the price axis at $0.25. - At the price floor of $0.18, the quantity supplied is 260 billion, and the quantity demanded is 140 billion. - To support the price floor, the USDA buys up the 120 billion pounds of excess milk. In the absence of a price floor, how much consumer surplus is created? How much producer surplus? What is the total surplus (producer surplus plus consumer surplus)? a. Consumer surplus = $ b. Producer surplus = $ c. Total surplus = $

a. 10 b. 10 c. 20

Suppose the schedule depicts a hypothetical market for concert tickets at a local college venue. Because students are paying such high prices, a price ceiling of $40 per concert is being considered. Use the supply and demand schedules to answer the following questions. a. By how much does consumer surplus (CS) increase if the price ceiling is imposed? b. By how much does producer surplus (PS) decrease if the price ceiling is imposed? c. What is the value of the deadweight loss (DWL) associated with this price ceiling?

a. 250 b. 350 c. 100

Suppose it is decided that rent control in New York City will be abolished and that market rents will now prevail. Assume that all rental units are identical and so are offered at the same rent. To address the plight of residents who may be unable to pay the market rent, an income supplement will be paid to all low income households equal to the difference between the old controlled rent and the new market rent. a. What effect will the elimination of the rent control have on the quantity and quality of rental housing supplied? -Eliminating the rent control will cause both quantity supplied and housing quality to increase. -Eliminating the rent control will cause quantity supplied to increase but housing quality to decrease. -Eliminating the rent control will cause both quantity supplied and housing quality to decrease. -Eliminating the rent control will cause quantity supplied to decrease but housing quality to improve.

a. Eliminating the rent control will cause both quantity supplied and housing quality to increase.

In order to appeal to voters, the mayor of Gotham City decides to lower the price of taxi rides. Assume, for simplicity, that all taxi rides are the same distance and therefore cost the same. The accompanying table shows the demand and supply schedules for taxi rides. Assume that there are no restrictions on the number of taxi rides that can be supplied (there is no medallion system). Find the equilibrium price and quantity. a. Equilibrium price: $ b. Equilibrium quantity:

a. Equilibrium price: $6.50 b. Equilibrium quantity: 11 million

Please identify the appropriate term for the following scenarios. a. Garet is an undergraduate student who has to work at McDonald's part-time to help pay his tuition loans. Always looking on the bright side of things, he is thankful that he cannot make less than what he is earning, $7.25/hour. b. D'Artagnan, a poor French noblemen, discovers a large cache of truffles in his backyard. However, the government caps the sale of truffles at $100/pound, which frustrates D'Artagnan because he knows they are worth more than that. c. To help out farmers, the government sets the minimum price of potatoes at $26 per bushel. d. In order to support domestic sales of textiles, the country of Germany puts a cap on the amount of foreign textiles it imports.

a. Garet's wage: Price Floor b. The truffles price cap: Price Ceiling c. Minimum potato price: Price Floor d. Cap on imports: Quota

Please identify the appropriate term for the following scenarios. a. Ivan, a Russian fishermen, needs a permit so that he can participate in commercial ice fishing for yellow perch and legally sell the perch he catches. b. Garet is an undergraduate student who has to work at McDonald's part-time to help pay his tuition loans. Always looking on the bright side of things, he is thankful that he cannot make less than what he is earning, $7.25/hour. c. D'Artagnan, a poor French noblemen, discovers a large cache of truffles in his backyard. However, the government caps the sale of truffles at $100/pound, which frustrates D'Artagnan because he knows they are worth more than that. d. Athos is an avid collector of swords, but as they are illegal to purchase, he obtains them through illicit means. e. To help out farmers, the government sets the minimum price of potatoes at $26 per bushel. f. In order to support domestic sales of textiles, the country of Germany puts a cap on the amount of foreign textiles it imports.

a. Ivan's permit: License b. Garet's wage: Price Floor c. The truffles price cap: Price Ceiling d. Buying swords illegally: Black Market e. Minimum potato price: Price Floor f. Cap on imports: Quota

The accompanying diagram shows data from the U.S. Bureau of Labor Statistics on the average price of an airline ticket in the United States from 1975 until 1985, adjusted to eliminate the effect of inflation (the general increase in the prices of all goods over time). In 1978, the U.S. Airline Deregulation Act removed the price floor on airline fares, and it also allowed the airlines greater flexibility to offer new routes. a. Looking at the data on airline ticket prices in the diagram, do you think the price floor that existed before 1978 was binding or nonbinding? That is, do you think it was set above or below the equilibrium price? On the supply and demand diagram, show where the price floor existed before 1978 in relation to the equilibrium price. b. Most economists agree that the average airline ticket price per mile traveled actually fell as a result of the Airline Deregulation Act. How might you reconcile that view with what you see in the diagram? -The average ticket price increased due to the increase in security checks and monitoring of terrorist activity. But the cost per mile traveled fell as there was an overall increase in incomes. -The average ticket price increased due to monopoly pricing by the airlines, so people cut back on flying, and demand fell. The result was a fall in cost per mile traveled. -The average ticket price increased due to the OPEC oil shock, and airline costs increased. However, for consumers, the cost per mile traveled fell as the government offered rebates on air travel. -The average ticket price increased, but the average flight distance increased as airlines could offer longer-range flights. So the cost per mile traveled fell.

a. Place the line on the lowest points b. The average ticket price increased, but the average flight distance increased as airlines could offer longer-range flights. So the cost per mile traveled fell.

Suppose the graph depicts a hypothetical market for concert tickets at a local college venue. Because students are paying such high prices, a price ceiling of $40 per concert is being considered. a. Move the price ceiling line to correctly depict the price ceiling of $40. b. By how much does consumer surplus (CS) increase if the price ceiling is imposed? c. By how much does producer surplus (PS) decrease if the price ceiling is imposed? d. What is the value of the deadweight loss (DWL) associated with this price ceiling?

a. Refer to photo Horizontal line on $40 b. 250 c. 350 d. 100

Suppose the government sets a price floor of $6.00 per bushel of corn. a. Use the deadweight loss (DWL) area to show the deadweight loss associated with the price floor. b. What is the change in producer surplus after the introduction of the price floor? change in producer surplus: $ c. What is the reduction in total surplus? reduction in total surplus: $

a. Refer to photo Point 1- (2.0, 6) Point 2- (3.0, 4.5) where the lines cross Point 3- (2.0, 3) b. 2.25 c. 1.5

A small town in Newfoundland, Canada has imposed a production quota of 4,000 crabs per month. a. Use the line segment in the graph to show a production quota of 4,000 crabs per month, then answer the question. b. What is the price of crab after the introduction of the quota?

a. Vertical line Top point- (4,000, 8) Bottom- (4,000, 0) b. price: $7

Suppose that, to make bread affordable for low-income consumers, the government imposes a price ceiling on bread. a. In the graph below, adjust the price line to show a binding price ceiling. b. Which of the following are potential consequences of a price ceiling on bread? -a shortage of bread -the development of a black market in bread -a decline in the quality of bread -a decrease in the opportunity cost of searching for bread

a. refer to picture (move line to bottom line) b. -a shortage of bread -the development of a black market in bread -a decline in the quality of bread

Suppose that in your state, the minimum wage is $12 per hour. Yet, you notice that many fast-food restaurants have posted help wanted signs for jobs paying $15 per hour. What does this tell you about the minimum wage and the availability of restaurant work in your town? a. The minimum wage is binding for fast-food jobs. b. Few workers are willing and able to work fast-food jobs for minimum wage. c. The $15 pay will attract higher quality workers to work at fast-food restaurants. d. The demand for fast food is weak in your town.

b. Few workers are willing and able to work fast-food jobs for minimum wage.

1. In order to ingratiate himself with voters, the mayor of Gotham City decides to lower the price of taxi rides. Assume, for simplicity, that all taxi rides are the same distance and therefore cost the same. The accompanying table shows the demand and supply schedules for taxi rides. b. Suppose that the mayor sets a price ceiling at $5.50. How large is the shortage of rides? c. Who loses and who benefits from this policy? -Some taxi drivers benefit, some lose, but all riders lose. -Taxi drivers benefit and riders lose. -Some riders benefit, some lose, but all taxi drivers lose. -Riders benefit and taxi drivers lose.

b. Shortage of rides: 4 million c. Some riders benefit, some lose, but all taxi drivers lose.

Suppose the table represents the labor market of Yemen. If Yemen enacts a minimum wage of $8.00 per hour, the labor market will experience a. neither a shortage nor a surplus since the minimum wage is not binding. b. a shortage of 2,000 workers. c. a surplus of 2,000 workers. d. a shortage of 4,000 workers. e. a surplus of 4,000 workers.

e. a surplus of 4,000 workers.


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