micro ch 3

Suppose the city council in a large city decides to pass a law which forces landlords to charge a maximum rent of $750/month for a one-bedroom apartment. Prior to the rent control, the average rent for a one-bedroom apartment was $1,750/month. a. Which is likely to occur as a result of the price ceiling? b. The answer above is an example of

a. Landlords will begin decreasing the quality of one-bedroom apartments by not making repairs or paying for upkeep. b. inefficiently low quality.

In the late eighteenth century, the price of bread in New York City was controlled and set at a predetermined price above the market price. One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread and therefore an increase in its market price. New York bakers found that the controlled price of bread in New York was below the market price. a. Draw a diagram showing the effect of the price control on the market for bread during this one year. Did the policy act as a price ceiling or a price floor? b. This policy acted as a price c. What kind of inefficiency is unlikely to have occurred during this period?

a. controlled price line horizontally 1.5 units below equillibrium b. ceiling c. It leads to a persistent surplus of the good.

The graph shows the supply and demand curve for dry erase markers. Suppose the government decides to impose a binding price ceiling on the market. a. Place the price ceiling line segment to illustrate this new government policy. b. Shade the area representing the deadweight loss (DWL) that arises due to the price ceiling. c. After the price ceiling is implemented, there is

a. price ceiling horizontal line 1 unit below equilibrium b. DWL triangle rightmost point at equilibrium bottom point (left 2, down 1) top point (up 2, left 2) c. a shortage

For the last 85 years, the U.S. government has used price supports to provide income assistance to American farmers. To implement these price supports, at times, the government has used price floors, which it maintains by buying up the surplus farm products. At other times, it has used target prices, a policy by which the government gives the farmer an amount equal to the difference between the market price and the target price for each unit sold. Consider the market for corn depicted in the accompanying diagram. c. Which of these programs (in parts a and b) costs corn consumers more? Which program costs the government more? Explain. 1. Which program costs consumers more and why? 2. Which program costs the government more and why? 3. Is one of these policies less inefficient than the other? Explain.

1. The price floor costs consumers more because they pay $5$5 per bushel compared to $3$3 under the target price policy. 2. Both programs cost the government the same amount because one program's higher cost to the government per bushel is offset by a lower quantity. 3. The target price policy is less inefficient because it avoids creating an incentive to waste scarce resources producing unwanted corn.

Price Controls and Quotas — End of Chapter Problem 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?

a. price floor 3 units below equilibrium 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.

Betty purchases raw (unpasteurized) milk even though the sale of raw milk is illegal.

black market