EOC5: End of Chapter Problems - Ch. 5: Price Controls and Quotas: Meddling with Markets

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. With the price floor at $0.18 per pound of milk, how much consumer surplus is created? Do not round your answer. Consumer surplus with the price floor: $ ____________ With the price floor at $0.18 per pound of milk, how much producer surplus is created? Do not round your answer. Hint: the price producers receive here is above the equilibrium price, but is calculated the same way as if you were considering the equilibrium price. Producer surplus with the price floor: $ _______________ With the price floor at $0.18 per pound of milk, how much money does the USDA spend to buy surplus milk? Do not round your answer. Value of milk bought by the USDA: $ _______________

(0.25-0.18)= 0.07->(0.07*140)/2= 4.9 (0.18-0.05)= 0.13->(0.13*260)/2= 16.9 (0.18*120)= 21.6

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)? Consumer surplus = $ ___________ Producer surplus = $ ____________ Total surplus = $ ____________

10 10 20

In Maine, you must have a license to harvest lobster commercially; these licenses are issued yearly. The state of Maine is concerned about the dwindling supplies of lobster found off its coast. The state fishery department has therefore decided to place a yearly quota of 80,000 pounds of lobsters harvested in all Maine waters. It has also decided to give licenses this year only to fishermen who had licenses last year. The accompanying diagram shows the demand and supply curves for Maine lobsters. In the absence of government restrictions, what are the equilibrium price and quantity? The equilibrium price is $ _____________ The equilibrium quantity is _____________ thousand pounds of lobsters.

10 120

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. When the USDA purchases the excess supply, the milk soon spoils and is discarded. As a result, the total surplus is reduced by the amount the USDA spent buying surplus milk. Assume that the taxes used to pay for the USDA purchases are not levied on the market for milk but from other sources. What is the total surplus when there is a price floor? Do not round your answer. Total surplus: $ __________ How does this total surplus compare to the total surplus without a price floor from part a?

21.8-21.6= 0.2 The total surplus with the price floor is less than the total surplus without the price floor.

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. Equilibrium price: $ _____________ Equilibrium quantity: _______________ million

6.5 11

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? Price: $ ___________ Quantity: ___________ million rides per year Quota rent: $ ___________ per ride Graph:

7 10 1 Graph: Quota Line vertical at y-axis at: 10 & 7.0

Oregon recently became the first state to adopt legislation capping housing rents statewide. Indicate how Oregon's policy will affect landlords, renters, and the quality of rental units available. Affect on landlords, Affect on renters, Affect on rental units

Affect on landlords: reduced incentive to offer housing for rent, might not be able to pay for repair costs. Affect on renters: a lot of time and effort needed to find housing, might not be able to find housing to rent, might illegally sublet the housing. Affect on rental units: condition worsens, quality falls.

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?

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

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. After the introduction of the price ceiling, the price falls to PC and the quantity bought and sold falls to QC. a. Show the consumer surplus after the introduction of the price ceiling by using the shape CS (assuming that the consumers with the highest willingness to pay get to buy the available coffee beans; that is, assuming that there is no inefficient allocation to consumers). b. Show the producer surplus after the introduction of the price ceiling by using the shape PS (assuming that the producers with the lowest cost get to sell their coffee beans; that is, assuming that there is no inefficient allocation of sales among producers).

Graph: Consumer Surplus: Top Half to Qc. Producer Surplus: Bottom Triangle Below Price Ceiling

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.

Graph: Consumer Top Left Half Triangle, Producer Bottom Left Half Triangle.

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 imposition of the high minimum wage causes a contraction in the economy so that employers in the formal sector cut their production and their demand for workers. Illustrate the effect of this on the overall market for labor. Graph: Assuming no other change to the economy, this will cause unemployment caused by the minimum wage to ____________

Graph: D-Line shift left 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. Suppose that the mayor sets a price ceiling at $5.50. How large is the shortage of rides? Illustrate by moving the line labeled Shortage to the appropriate position on the graph.

Graph: Horizontal Shortage line at y-axis at 5.5

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.

Graph: Left Triangle below Price Floor.

Many college students attempt to land internships before graduation to burnish their resumes, gain experience in a chosen field, or try out possible careers. Suppose that summer internships have an equilibrium wage of $0 as employers are able to find plenty of interns willing to work just for the resume boost. Suppose a major economic downturn hits the labor market for college graduates. Jobs become more competitive and the increased experience form a summer internship leads to more job offers. This increases the supply of students looking for unpaid summer internships. Adjust the graph to depict this change in the market for unpaid summer internships. Assume that employers are not willing to allow summer interns to pay employers for the ability to work for them (think about how bad that PR would be!). This means that $0 is an effective minimum wage in this market. Show how this actually creates a deadweight loss (DWL) by shading the area of deadweight loss after the change in supply.

Graph: Supply shift right below 0. Deadweight Loss Left triangle.

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. The accompanying graph depicts the labor market for minimum wage jobs. Place the endpoints of the surplus line to indicate the size of the surplus of labor at a minimum wage which impacts the labor market. Then, place the DWL triangle to depict the deadweight loss caused by the minimum wage.

Graph: Surplus above equilibrium. Deadweight Loss Left Triangle.

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. After the introduction of the price ceiling, the price falls to PC and the quantity bought and sold falls to QC. a. Using the diagram, show how much of what was producer surplus before the introduction of the price ceiling has been transferred to consumers as a result of the price ceiling by correctly placing the quadrilateral labeled "Transfer." b. Using the diagram, show how much of what was total surplus before the introduction of the price ceiling has been lost. That is, correctly place the deadweight loss (DWL) area.

Graph: Transfer: Rectangle Pe, Pc, Qc, E. Deadweight Loss: Left E, Qc.

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. Suppose that the stock market crashes, and, as a result, people in Gotham City are poorer. This reduces the quantity of taxi rides demanded by 6 million rides per year at any given price. Illustrate this change in the market below, paying special attention to the scale on the quantity axis. What effect will the mayor's new policy have now? Graph:

It will have no effect. Graph: D-Line shift to 2 left.

Many Washington State residents and politicians are concerned about the declining salmon population, a primary food source for local wildlife, including the endangered orca whale. To protect the salmon population from overfishing, politicians are considering two policies. The first is a binding price ceiling in the market for salmon. The second policy is a quota: permits would be sold to those who fish commercially in order to restrict their salmon catch. As events have unfolded, it's become clear that politicians tend to favor the quota system while those who catch fish for a living prefer a price ceiling. Why do you think this is the case?

Reasons politicians favor the quota system: Revenue from permits, The quota is set according to an environmentally safe level of fishing. Reasons people who catch fish prefer price ceiling: Excess demand means that all fish will be sold, No restriction on who can supply the fish, Quota holders benefit and can exert political pressure. Explanation: Politicians might favor a quota system as selling permits can generate revenue for the state. They are easier to implement, as only the producers who have the license can catch the fish. And once the environmentally friendly level of catch is determined, the appropriate amount of permits can be sold. Those who catch fish might favor a price ceiling as it restricts price and leads to high demand. There are many buyers in the market and not enough of the good. Producers who are able to and can supply at the set price are free to take part in the market. They don't need a permit to sell. Furthermore, in a quota system, those who have the permits are the ones who sell and benefit. They can exert political pressure to acquire the permit every year and keep the other producers out of the market.

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. a. How much surplus milk will be produced as a result of this policy? b. What will be the cost to the government of this policy? c. Since milk is an important source of protein and calcium, the government decides to provide the surplus milk it purchases to elementary schools at a price of only $0.60 per pint. Assume that schools will buy any amount of milk available at this low price. Parents now reduce their purchases of milk at any price by 50 million pints per year because they know their children are getting milk at school. How much will the dairy program now cost the government? d. Explain how inefficiencies in the form of inefficient allocation to sellers and wasted resources arise from this policy. Inefficient allocation occurs as some milk producers are not efficient. If price was allowed to _______________ to equilibrium, they would find it too costly to produce. Resources are wasted as the government spends significant amounts of money on milk __________.

a. 100 million pints per year b. $100 million c. $60 million d. fall, purchases

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. a. If the government sets a price floor of $5 per bushel, how many bushels of corn are produced? How many are purchased by consumers? By the government? How much does the program cost the government? How much revenue do corn farmers receive? How many bushels are produced? ___________ bushels How many bushels are purchased by consumers? _______________ bushels How many bushels are purchased by the government? ___________ bushels How much does the program cost the government? $_______________ How much revenue do corn farmers receive? $ _______________

a. 1200 800 400 2000 6000

In Maine, you must have a license to harvest lobster commercially; these licenses are issued yearly. The state of Maine is concerned about the dwindling supplies of lobster found off its coast. The state fishery department has decided to place a yearly quota of 80,000 pounds of lobsters harvested in all Maine waters. It has also decided to give licenses this year only to fishermen who had licenses last year. The accompanying diagram shows the demand and supply curves for Maine lobsters. a. What is the demand price at which consumers wish to purchase 80,000 pounds of lobsters? $ ____________ per pound b. What is the supply price at which suppliers are willing to supply 80,000 pounds of lobsters? $ __________ per pound c. What is the quota rent per pound of lobster when 80,000 pounds are sold? $ __________ d. Identify a transaction that benefits both buyers and sellers but is prevented by the quota restriction.

a. 14 b. 8 c. 6 d. Trade 80,001 pounds of lobsters at a price between $8 and $14

European governments tend to make greater use of price controls than does the U.S. government. For example, the French government sets minimum starting yearly wages for new hires who have completed le bac, a certification roughly equivalent to a high school diploma. The demand schedule for new hires with le bac and the supply schedule for similarly credentialed new job seekers are given in the accompanying table. The price here—given in euros, the currency used in France—is the same as the yearly wage. a. In the absence of government interference, what are the equilibrium wage and number of graduates hired per year? Will there be anyone seeking a job at the equilibrium wage who is unable to find one—that is, will there be anyone who is involuntarily unemployed? Equilibrium wage = _____________ euros Number of graduates hired at equilibrium wage = At this wage, _________ will be involuntarily unemployed. b. Suppose the French government sets a minimum yearly wage of €35,000. Is there any involuntary unemployment at this wage? Involuntary unemployment at a wage of €35,000 will be ______workers. If the minimum wage is set at €40,000, involuntary employment will be __________ workers. c. Given your answer to part b and the information in the table, what do you think is the relationship between the level of involuntary unemployment and the level of the minimum wage? Who benefits from such a policy? The higher the minimum wage, the __________ the involuntary unemployment. Workers who _____________ hired, benefit from such a policy.

a. 30000 290000 no one b. Yes 60000 100000 c. higher, get

In the late eighteenth century, the price of bread in New York City was controlled, set at a predetermined price above the market price. a. On the accompanying diagram, place the controlled price line to demonstrate the market for bread in the eighteenth century. Remember, the controlled price is binding. Graph: The policy acted as a price b. What kind of inefficiency is unlikely to have arisen when the controlled price of bread is above the market price?

a. Graph: Controlled price horizontal above equilibrium. floor. b. It leads to a persistent shortage of the good.

The waters off the North Atlantic coast were once teeming with fish. But because of overfishing by the commercial fishing industry, the stocks of fish became seriously depleted. In 1991, the National Marine Fishery Service of the U.S. government implemented a quota to allow fish stocks to recover. In 2016 the quota limited the amount of swordfish caught per year by all U.S.-licensed fishing boats to 7 million pounds. As soon as the U.S. fishing fleet had met the quota limit, the swordfish catch was closed down for the rest of the year. The accompanying table gives the hypothetical demand and supply schedules for swordfish caught in the United States per year. a. Use a diagram to show the effect of the quota on the market for swordfish in 1991. In your diagram, illustrate the deadweight loss from inefficiently low quantity. Graph: b. How do you think fishermen will change how they fish in response to this policy? Fishermen will

a. Graph: Vertical x-axis Quota. D-Line: (6, 20), (10, 12) S-Line: (7, 12), (15, 20) b. rush to catch as many fish as they can before the quota is met.

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 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.

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. b. Suppose the government sets a target price of $5 per bushel for any quantity supplied up to 1,000 bushels. How many bushels of corn are purchased by consumers and at what price? By the government? How much does the program cost the government? How much revenue do corn farmers receive? How many bushels of corn are purchased by consumers? _______ bushels What price will consumers pay? $_______________ How many bushels are purchased by the government? ___________ bushels How much does the program cost the government? $_______________ How much revenue do corn farmers receive? $ _______________

b. 1000 3 0 2000 5000

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. Which program costs consumers more and why? Which program costs the government more and why? d. Is one of these policies less inefficient than the other? Explain.

c. The price floor costs consumers more because they pay $⁢5 per bushel compared to $⁢3 under the target price policy. 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. d. The target price policy is less inefficient because it avoids creating an incentive to waste scarce resources producing unwanted corn.

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. 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? This policy acted as a price Graph: What kind of inefficiency is unlikely to have occurred during this period?

ceiling. Graph: Controlled Price horizontal below equilibrium. It leads to a persistent surplus of the good.

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 __________ in the informal market and the equilibrium wage will ___________.

increase, fall