4.3 Government Intervention in the Market: Price Floors and Price Ceilings
Use the information in the following table (and in the graph to the right) on the market for apartments in Bay City to answer the following questions. Rent Quantity Demanded Quantity Supplied $200 275,000 125,000 300 250,000 150,000 400 225,000 175,000 500 200,000 200,000 600 175,000 225,000 700 150,000 250,000 In the absence of rent control, what is the equilibrium rent and the equilibrium quantity of apartments rented? Equilibrium rent is $______ and the equilibrium quantity is __________ thousand apartments. In equilibrium, will there be any renters who are unable to find an apartment to rent or any landlords who are unable to find a renter for an apartment? With the price ceiling, the quantity demanded is ______ thousand apartments and the quantity supplied is ____________ thousand apartments Assume that all landlords abide by the law. Compare the economic surplus in this market when there is no price ceiling to when there is a price ceiling. 1.) Use the triangle drawing tool to shade in the change in economic surplus as a result of the price ceiling. Properly label this shaded area indicating whether surplus has increased (new economic surplus) or decreased (deadweight loss) 2.) Use the rectangle drawing tool to shade in transferred surplus as a result of the price ceiling. Properly label this shaded area indicating whether this surplus is transferred from producers to consumers (transfer to consumer) or from consumers to producers (transfer to producer). Assume that the quantity of apartments supplied is the same as you determined above. But now assume that landlords ignore the law and rent this quantity of apartments for the highest rent they can get. Briefly explain what this rent will be. If landlords supply only 175 thousand apartments and ignore the price ceiling, then they can charge rent of $
$500;200 thousand apartments NO 225 thousand apartments; 175 thousand apartments $600
Use the information on the kumquat market in the table to answer the questions. Price (Per Crate) Quantity Demanded Quantity Supplied $10 140 40 15 130 80 20 120 120 25 110 160 30 100 200 35 90 240 A. The equilibrium price is $______________ and the equilibrium quantity is ______ million crates B. Suppose the federal government imposes a price floor of $30 per crate and purchases any surplus kumquats from producers. Now how much revenue will kumquat producers receive? Kumquat producers will receive $______ billion in revenue. C. Unsure of how to graph
A. $20; 120 million crates B. 6 Billions ($30x200million)
The figure to the right illustrates the market for apples in which the government has imposed a price floor of $13 per crate A. How many crates of apples will be sold after the price floor has been imposed? B. Will there be a shortage or surplus? If there is a shortage or surplus, how large will it be? C. Will apple producers benefit from the price floor? a. Apple producers who are able to sell their apples at the $1010 price per crate will benefit. b. Apple producers who are not able to sell their apples will not benefit. c. Total revenue for apple producers as a group will increase from $198 million to $200 million. d. Both a and b. e. All of the above.
A. 14 million B. There will be a surplus of 12 millions crated of apples per year C. All of the above.
Use the information on the kumquat market in the following table to answer the questions. (Quantities are given in millions of crates per year.) Price (Per Crate) Quantity Demanded Quantity Supplied $10 120 20 15 110 60 20 100 100 25 90 140 30 80 180 35 70 220 A. The equilibrium price is $_______ and the equilibrium quantity is ______ million crates. B. How much revenue do kumquat producers receive when the market is in equilibrium? Kumquat producers receive $_____ billion in revenue. C. Suppose the federal government decides to impose a price floor of $25 per crate. Assume that the government does not purchase any surplus kumquats. Now how many crates of kumquats will consumers purchase? Consumers will purchase _____ million crates of kumquats. D. How much revenue will kumquat producers receive? Kumquat producers will receive $_____ billion in revenue.
A. Equilibrium price: $20; Equilibrium quantity: 100 million crates B. $2 billions C. 90 million D. $2.3 billions
When the government imposes price floors or price ceilings, which of the following occurs?
A. Some people lose. B. Some people win. C. There is a loss of economic efficiency. D. All of the above occur.
Black markets may arise A. in reaction to binding price ceilings. B. in reaction to non-binding price ceilings. C. in reaction to excessive producer surplus. D. in reaction to insufficient consumer surplus. E. both a and b.
A. in reaction to binding price ceilings.
An editorial in the Economist discusses the fact that in most countries dash—including the United States dash—it is illegal for individuals to buy or sell body parts, such as kidneys. Source: "Psst, Wanna Buy a Kidney?" Economist, November 18, 2006, p.15. 1.) Use the point drawing tool to indicate the quantity of kidneys supplied at the legal maximum price of zero. Properly label this point. (Hint: Because we know that some kidneys are donated, the quantity supplied will not be zero.) The editorial argues that buying and selling kidneys should be legalized: "With proper regulation, a kidney market would be a big improvement over the current sorry state of affairs. Sellers could be checked for disease and drug use, and cared for after operations...Buyers would get better kidneys, faster. Both sellers and buyers would do better than in the illegal market, where much of the money goes to middlemen." Do you agree with the argument? Should the government treat kidneys like other goods and allow the market to determine price?
A.Yes. Legalizing the exchange of kidneys would increase the quantitysupplied, benefiting those who need a kidney but are unable to obtain one due to the shortage. B.No. Legalizing the exchange of kidneys would hurt those who otherwise would have been supplied a kidney at no cost. C.Yes. Legalizing the exchange of kidneys would hurt suppliers by decreasing the amount they could receive for providing a kidney. D.Yes. Legalizing the exchange of kidneys would benefit consumers by lowering the price. E.Both a and b are reasonable arguments.
University towns with major football programs experience an increase in demand for hotel rooms during home football weekends. Hotel management responds to the increase in demand by increasing the price they charge for a room. Periodically, there is an outcry against the higher prices and accusations of "price gouging." In the diagram to the right, a pair of drawing tools are to be used to produce the following six (6) objects. First, use the line drawing tool to draw and label the following three (3) curves: First, use the line drawing tool to draw and label the following three (3) curves: 1.) The supply curve (S) of hotel rooms in Boostertown; 2.) The demand curve (D1) for hotel rooms during weekends without home football games; 3.) The demand curve (D2) for hotel rooms during weekends with home football games; Second, use the point drawing tool to: 4.) Identify and label (as E1) the equilibrium point when no home game is played and 5.) Identify and label (as E2) the equilibrium point when a home game is played. Finally, use the line drawing tool one more time to draw and label: 6.) A line (PC) representing a law passed by the Boostertown city council preventing room prices from rising above the prices when no home game is played.
According to your graph, the market for hotel rooms during weekends with home football games experiences a shortage of rooms. If the prices of hotel rooms are not allowed to increase, out-of-town football fans will A. not all be able to find rooms. B. look elsewhere for lodging. C. possibly engage in bribery. D. be less inclined to visit in the future. E. all of the above. Over time, the city council's law may cause the supply of hotel rooms to decrease. University towns are not the only places that face peak and non-peak "seasons." Which of the following locations may also face a large increase in demand for hotel rooms during particular times of the year? A. Snow-skiing resorts B. National parks. D. Beach destinations. We do not typically see laws limiting the prices hotels can charge during peak seasons since those prices merely offset low prices and very high vacancy rates experienced during the off season.
Refer to the graph to the right. After rent control is imposed, area A represents A.the consumer surplus transferred from renters to landlords. B. the producer surplus transferred from landlords to renters. C. a deadweight loss. D. a shortage of apartments.
B. the producer surplus transferred from landlords to renters.
Refer to the graph to the right. After the government imposes a price of $3.50 in this market, area A represents: A. the producer surplus transferred to consumers. B. a deadweight loss. C. total economic surplus. D. the consumer surplus transferred to producers.
D. the consumer surplus transferred to producers.
The competitive equilibrium rent in the city of Lowell is currently $1,000 per month. The government decides to enact rent control and to establish a price ceiling for apartments of $750 per month. Briefly explain whether rent control is likely to make each of the following people better or worse off. Someone currently renting an apartment in Lowell A. will be better off if they keep their apartment because rent is lower due to the price ceiling. B. will be worse off if they lose their apartment. C. will be worse off regardless of whether they keep their apartment because there is a shortage of apartments. D. will be better off regardless of whether they keep their apartment because rent is lower due to the price ceiling. E. both a and b. Someone who will be moving to Lowell next year and who intends to rent an apartment A. will be better off if they are able to find an apartment to rent because rent is lower due to the price ceiling. B. will be worse off if they are unable to find an apartment to rent. C. will be better off regardless of whether they find an apartment to rent because rent is lower due to the price ceiling. D. will be worse off regardless of whether they find an apartment to rent because there is a shortage of apartments. E. both a and b. A landlord who intends to abide by the rent control law A. will be worse off because he will be receiving less rent. B. will be worse off because there will be a shortage of apartments. C. will be better off because he will be receiving more rent. D. will be better off because there will be a shortage of apartments. E. both a and b. A landlord who intends to ignore the law and illegally charge the highest rent possible for his apartments A. will be better off if he does not get caught because that amount will be above the equilibrium. B. will be worse off if he gets caught. C. will be worse off regardless of whether he gets caught because that amount will still be below the equilibrium. D. will be better off because the highest rent possible and the price ceiling are both above the equilibrium. E. both a and b.
E. both a and b. E. both a and b. A. will be worse off because he will be receiving less rent E. both a and b.
Can economic analysis provide a final answer to the question of whether the government should intervene in markets by imposing price ceilings and price floors? Why or why not?
Economic analysis cannot provide such an answer because it seeks to address positive questions such as "what is.
Suppose that the government sets a price floor for milk that is above the competitive equilibrium price. Identify the price and quantity sold when there is a price floor. Then show the change in economic surplus caused by the price floor. 1.) Use the point drawing tool to identify the quantity that is sold and the price with the price floor. Label the point 'Quantity sold'. 2.) Use the triangle drawing tool to shade the change in economic surplus as a result of the price floor. If there is an increase in surplus, label it 'new economic surplus'; if there is a decrease in surplus, label it 'deadweight loss'.
Only map quantity sold & deadweight loss
Why do some consumers tend to favor price controls while others tend to oppose them?
Price ceilings generate shortages. Consequently, the consumers who obtain the product at a lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage.
Briefly explain whether you agree or disagree with the following statement: "If there is a shortage of a good, it must be scarce, but there is not a shortage of every scarce good."
The statement is correct because every good (except undesirable things) is scarce.
A black market is
a market in which buying and selling occur at prices that violate government price regulations.
In Allentown, Pennsylvania, in the summer of 2014, the average price of a gallon of gasoline was $3.68—a 22-cent increase from the year before. Many consumers were upset by the increase. One was quoted in a local newspaper as saying, "It's crazy. The government should step in." Suppose the government had stepped in and imposed a price ceiling equal to old price of $3.46 per gallon. a. Using the line drawing tool, draw and label the price ceiling. a-i. Before the price ceiling is imposed, the equilibrium price is $_____ , and the equilibrium quantity is _________ thousand gallons. After the price ceiling is imposed, the equilibrium price is $______. The quantity demanded is _______ thousand gallons and the quantity supplied is ______________ thousand gallons. a.-ii. Remembering that the quantity is measured in thousands, before the price ceiling is imposed, the consumer surplus is $_______ , and the producer surplus is $________________. ** After the price ceiling is imposed, the consumer surplus is $_______________ , and the producer surplus is $______________. a.-iii. Remembering that the quantity is measured in thousands, the deadweight loss after the price ceiling is imposed is $________________ b. Will the consumer who was complaining about the increase in the price of gasoline definitely be made better off by the price ceiling?
a-i. $3.46; 20 thousand gallons; 4 thousand gallons a-ii. $1100; $1800 Consumer surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays. When the price is not zero, consumer surplus is the area below the demand curve and above the market price. [(($3.90−$3.68)×10,000)×0.5]. The the total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price. Producer surplus is the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. [(($3.68−$3.32)×10,000)×0.5]. **. $1600; $280 Consumer surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays. When the price is not zero, consumer surplus is the area below the demand curve and above the market price. [(($3.90−$3.82)×4,000)×0.5] + [($3.82−$3.46)×4,000]. The the total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price. Producer surplus is the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. [(($3.46−$3.32)×4,000)×0.5]. a.-iii. $1080 The reduction in economic surplus resulting from a market not being in competitive equilibrium is called the deadweight loss. In this case the deadweight loss is [(($3.82−$3.46)×6,000)×0.5]. b. Maybe, if the consumer can get gasoline.
Which of the following terms corresponds to a market in which buying and selling take place at prices that violate government price regulations?
black market
A student makes the following argument: "A price floor reduces the amount of a product that consumers buy because it keeps the price above the competitive market equilibrium. A price ceiling, on the other hand, increases the amount of the product that consumers buy because it keeps the price below the competitive market equilibrium." Do you agree with the student's reasoning? To address this, first, add a binding price floor and a binding price ceiling 1.) Use the line drawing tool to draw the price floor. Properly label this line. 2.) Use the line drawing tool to draw the price ceiling. Properly label this line. A price ceiling ____________________________
does not increase the amount of the product that consumers buy because it creates a shortage.
A Wall Street Journal article noted that a study by the U.S. Congressional Budget Office "estimated raising the minimum wage to $10.10 an hour would reduce U.S. employment by 500,000 but lift 900,000 Americans out of poverty." The minimum wage might reduce employment because _______ The minimum wage might raise some people out of poverty because _______. These estimates influence the normative analysis of the minimum wage because they __________.
employer costs would increase. it would increase the incomes of people who had minimum wage jobs previously. influence the judgement of policymakers and members of the general republic regarding this issue.
If San Francisco were to repeal its rent control law, the prices for short rentals in the city listed on Airbnb and other peer-to-peer sites would likely _____________
fall because there would be fewer apartments available
According to a news story, in late 2016, a recent college graduate in Caracas, Venezuela hadn't eaten meat in a month. He was quoted as saying: "Not because we can't find meat, but because it's very expensive." Meat, like other food in Venezuela, was subject to a price ceiling. The meat was very expensive, even with a price ceiling, because
it was sold on a black market.
Discussions of the economic results of rent control and of federal farm programs would be considered ________ analysis, and discussions of whether rent control and the farm programs are good or bad policies would be considered ________ analysis.
positive; normative
Do producers tend to favor price floors or price ceilings? Why? Producers favor
price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus.
According to an article in the New York Times, the Venezuelan government "imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find." Imposing price controls on goods would make them hard to find because
producers would not want to supply as much as they did before the price controls.
