Ch 8 Price Ceiling and Floors

2. When a price ceiling is in place keeping the price below the market price, what's larger: quantity demanded or quantity supplied? How does this explain the long lines and wasteful searches we see in price-controlled markets?

A price ceiling will make quantity demanded larger than quantity supplied. Those extra demanders wait in long line and wast efforts searching for scarce goods.

1. How does a free market eliminate a shortage?

By letting the price rise. This encourages demanders to demand less and suppliers to supply more, ending the shortage.

5. The Canadian government has wage controls for medical doctors. To keep things simple, let's assume that they set one wage for all doctors: $100,000 per year. It takes about 6 years to become a general practitioner or a pediatrician, but it takes about 8 or 9 years to become a specialist like gynecologist, surgeon, or ophthalmologist. What kind of doctor would you to become under this system?

If both jobs wages are the same than typically people would prefer to become a general practitioner or a pediatrician; the job is easier, and you get out school sooner.

8. In the chapter, we discussed how price ceiling can put goods in the wrong place, as when too little heating oil wound up in New Jersey during a harsh winter in the 1970s. Price controls can also put goods in the wrong time as well. If there are price controls on gasoline, can you think of some periods during which the shortage will get worse?

Oil refiners and truck drivers won't have the incentive to deliver the extra gasoline that people are demanding during the holiday periods, so some people will wait in long lines for scarce gas just at the time when they most want to travel.

12. A review of the jargon" is the minimum wage a "price ceiling" r a "price floor"? What about rent control?

Price ceiling occurs when the price is set above the market price. A price ceiling occurs when the price is set below the market price. The minimum wage is a price floor, while rent control is a price ceiling.

6. Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the United States rose from about $1.50 per gallon to more than $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations? Why?

There was no gas lines because this time there was no price controls on oil or gasoline.

14. The basic idea of deadweight loss is that a willing buyer and a willing seller can't find a way to make an exchange. In the case of the minimum wage law, the reason they can't make an exchange is because it's illegal for the buyer (the firm) to hire the seller (the worker) at any wage below the legal minimum. But how can this really be a "loss" from the worker's point of view? It's obvious why business owners would love to hire workers for less than the minimum wage; but if all companies obey the minimum wage law, why are some workers still willing to work for less than that?

They'd be willing to work for less than minimum wage because for many workers a low paying job is better than not working at all. The minimum wage prices some low-skilled workers out of market.

4. If a government decides to make health insurances affordable by requiring all health insurance companies to cut their prices by 30%, what will probably happen to the number of people covered by health insurance?

This will create shortage in health insurance, and fewer people will be covered.

13. How do U.S. business owners change their behavior when the minimum wage rises? How does this impact teenagers?

When the minimum wage rises, businesses look harder for alternatives to hiring low-skilled teenagers. They might hire a smaller number of skilled older workers, they might have machines do more of the work, or they might shorten teenage hours. If they can, businesses will also try to reduce other forms of on-the-job compensation such as benefits or lunch breaks. None of these are good for teenagers looking for work.

9. a) Consider Figure 8.8. In a price-controlled market like this one, when will consumer surplus be larger: in the short run or in the long run? b) In this market, supply is more elastic, more flexible, in the long run. In other words, in the longer term, landlords and home-builders can find something else to do for a living. In the light of this and in light of the geometry of producer surplus in this figure, do rent controls hurt landlords and home-builders more in the short run or the long run?

a) Consumer surplus will be larger in the short run, since the short run shortage is small. Thus, in the short run, consumers get lower prices and more or less same quantity of goods. But in the long run, the shortage increases, and consumers surplus falls. In addition, in the long run, key money, long waiting times, and reductions in quantity will all tend to eat up any benefit from lower prices. b) Landlords and homebuilders are hurt more in the short run; in the long run, they can just leave the market if things get too bad. Geometrically we can tell this is so because less producer surplus is lost in the long run as producers exit the industry.

7. Price controls distribute resources in many unintended way. In the following cases, who will probably spend more time waiting in line to get scarce, price- controlled goods? Choose one from each pair: a) Working or retired people b) Lawyers who charge $800 per hour or fastfood employees who ear $8 per hour c) People with desk jobs or people who can disappear for a couple of hours during the day?

a) Retired people b) Fastfood employees who earn $8 per hour c) People who can disappear for a couple of hours during the day The opportunity cost of free time is higher for other groups. Some lawyers might pay fastfood employees to wait in line on their behalf.

3. a) What is the equilibrium price and quantity of milk? b) If the government places a price ceiling of $2 on milk, will there be a shortage or surplus of milk? How large will it be? How many gallons of milk will be sold?

a) The equilibrium price will be $3 and the quantity of milk will be 3,500 b) If the government places a price ceiling of $2 on milk, there will be a shortage of 2,100 gallons. At price of $2, suppliers are willing to sell 2,000.

10. Business leaders often say that there is a "shortage of skilled workers, and so they argue that immigrants need to be brought in to do these jobs. EX. a recent AP article was entitled " New York farmers fear a shortage of skilled workers" and went on to point out that a special U.S visa program, the H-2A program, "allows employers to hire foreign workers temporarily if they show that they were not able to find U.S workers for the jobs. a) How do unregulated markets cure a "labor shortage" when there are no immigrants to boost the labor supply? b) Why are business reluctant to let unregulated markets cure the shortage?

a) Unregulated markets cure labor shortage by pushing up wages b) Business don't like paying higher wages. They'd like to increase the supply of labor.

11. a) If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would happen to the quantity supplied of bread? b) To keep it simple, assume that people must wait in line to get bread at the controlled price. Would consumer surplus rise, fall, or can't you tell with the information given? c) With these price controls on bread, would you expect bread quality to rise or fall?

a)The quantity supplied must fall- that's the easy part. b) Consumer surplus must drop. The cost of waiting in line for the bread is the key. That "time wasting" rectangle eats up any extra value that might have gone to consumers. c)Bread quality is most likely to fall.