Price Ceilings & Price Floors

A price ceiling..

A maximum price allowed by law

What is a price floor?

A minimum legal price for a product

Which of the following do price ceilings not cause? - a surplus of goods - bribes - waiting in line - search costs

A surplus of goods

When price floors are in effect goods and services

Are not necessarily supplied by their lowest-cost producer.

If quantity supplied equals 85 units and quantity demanded equals 80 units under a price control, then it is a...

Binding price floor

Unintended consequences of price floors

Dead-Weight losses Wasteful quality enhancements Wasted resources to produce surplus goods

Binding price floor set below the equilibrium market

Deadweight loss

Which of the following would not happen as a result of a price floor? - decreases in product quality - lost gains from trade - a surplus of the good - misallocation of resources

Decreases in product quality

Under a binding price ceiling, we expect the quality of a good to..

Fall

If there are 100 tickets to a concert and 200 fans that would like to go to the concert, each placing a slightly different value on the tickets, is it more efficient to hold an auction for the tickets or to hold a random drawing for the tickets?

Hold an auction

New housing takes some time to build, so rent control creates larger shortages in the...

Long run than in the short run because long-run supply is more elastic

What motivates price ceilings?

Motivated by the governments concern that the market equilibrium price is "too high"

What motivates price floor?

Motivated by the governments concern that the market equilibrium price is "too low" for small businesses to compete

An impact of price floors

Sellers may enhance the quality of their product or services

Impact of price ceilings

Sellers may reduce the quality of their product or services

Unintended consequences of price ceilings

Shortages Dead-Weight losses, Lost gains from trade, Quality losses Wasted time waiting in lines, search costs

A binding price floor leads to a..

Surplus

When will gains from trade be maximized?

When price ceilings are set above market equilibrium price

When do price ceilings have an impact?

When they are set below the equilibrium price