Chapter 4
If the absolute price of good X is $10 and the absolute and the absolute price of good Y is $14, then what is (a) the relative price of good X in terms of good Y and (b) the relative price of good Y in terms of good X?
(a) 1X= 5/7Y (b) 1Y= 7/5Y
What's the difference between a price ceiling and a price floor? What effect is the same for both a price ceiling and a price floor?
A price ceiling is a government-mandated maximum price for a good. When the price ceiling is below the equilibrium price, shortages, fewer exchanges, and buying and selling at prohibited prices occurs. A price floor is a government-mandated minimum price for a good. When the price floor is above the equilibrium price, surpluses and fewer exchanges occur. Both of them lead to fewer exchanges of goods or services.
Many of the proponents of price ceilings argue that government-mandated maximum prices simply reduce producers' profits and do not affect the quantity supplied of a good on the market. What must the supply curve look like if the price ceiling does not affect the quantity supplied?
For a price ceiling to not affect the quantity supplied, the supply curve would have to be horizontal.
If price is not the rationing device used, then individuals won't have was sharp an incentive to produce. Explain.
If price is the rationing device used, then individuals have incentive to produce goods and services, sell them for money, and then use the money to buy what they want. If another device were used, then incentive to produce would be lessened. Why would anyone produce a good if the only way to "sell" it is based on something like first come, first served?
"If prices were outlawed as the rationing device used in markets, there would be no need for another rationing device to take its place. We would have reached utopia." Discuss.
If price were outlawed, it would mean that there would be no difference in the relative scarcity of items, so all needs/wants that people have would be met, and we would have utopia.
Why is there a need for a rationing device, whether it is price or something else?
It is necessary because scarcity exists.
Should grades be "rationed" according to a dollar price rather than by how well a student does on exams? If they were, what would happen to the value of your degree?
No. If they were "rationed", rather than getting credit for their own hard work/ studying, students' grades would be dependent on how hard others worked as well. This would bring down the value of most people's educations.
James lives in a rent-controlled apartment and has for the past few weeks been trying to get his supervisor to fix his shower. How are the two related?
Since the supervisor can't raise the rent, he has little incentive to do additional work (fix the shower).
Give a numerical example that illustrates how a tax placed on the purchase of good X can change the relative price of good X in terms of good Y.
Suppose the equilibrium price of good X is $10 and the equilibrium price of good Y is $15. Then the relative price would be: 1X=2/3Y and 1Y=3/2X If a tax is placed on good X, and the price rises from $10 to $20. Then the relative price would be: 1X=4/3Y and 1Y=3/4X.
What kind of information does price transmit?
The relative scarcity of a good. (A rise in price indicates an increased relative scarcity, and vice versa).
Explain why fewer exchanges are made when a disequilibrium price (price below equilibrium) exists than when the equilibrium price exists.
When the price that exists is below equilibrium, although there will be a higher quantity demanded by customers, there will be a lower quantity supplied by producers, therefore there must be fewer exchanges made.
Do buyers prefer lower prices to higher ones?
Yes, but only if ceteris paribus applies. The buyers will only prefer the lower prices if things like quality, wait, and service.
Think about ticket scalpers. Might they exist because the tickets to these events were originally sold for less than the equilibrium price? In what way is a ticket scalper like and unlike your retail grocer, who buys food from a wholesaler and then sells it to you?
Yes- scalpers are able to sell tickets for a typically higher price than they originally were. This is because the original seller underestimated the demand for the item, and sold them for less than people were willing/ able to buy them for. This is very similar to a retail grocer, in that they are sold food for less than the equilibrium price, and then are able to make a profit for selling it at the price that customers are willing/ able to buy them at.
