EOC 8 Solutions - modern principles of economics 8 modern...

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S-1 MODERN PRINCIPLES : MACROECONOMICS 8 5 MODERN PRINCIPLES OF ECONOMICS Price Ceilings and Floors Facts and Tools 1. How does a free market eliminate a shortage? 1. By letting the price rise. This encourages demanders to demand less and suppliers to supply more, ending the shortage. 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? 2. A price ceiling will make quantity demanded larger than quantity supplied. Those extra demanders wait in long lines and waste effort searching for scarce goods. 3. Suppose that the quantity demanded and quantity supplied in the market for milk is as follows: Price per Gallon Quantity Demanded Quantity Supplied $5 1,000 5,000 $4 2,000 4,500 $3 3,500 3,500 $2 4,100 2,000 $1 6,000 1,000 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? 3. a. The equilibrium price is $3 and the equilibrium quantity is 3,500 gallons. b. If the government places a price ceiling of $2 on milk, there will be a shortage of 2,100 gallons. At a price of $2, suppliers will be willing to sell 2,000 gallons. 4. If a government decides to make health insurance 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? 4. This is just another price ceiling: It will create a shortage in health insurance, and not all people demanding health insurance will be covered. 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 a gynecologist, surgeon, or ophthalmologist. Solution Solution Solution Solution Cowen3e_Ch08_Solutions.indd 1 29/06/15 12:50 PM
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S-2     CHAPTER 8    Price Ceilings and Floors What kind of doctor would you want to become under this system? ( Note : The actual Canadian system does allow specialist to earn a bit more than general practitioners, but the difference isn’t big enough to matter.) 5. If both jobs pay about the same, most people would rather be a general practitioner— the job is easier, the hours are better, and you get out of school sooner. That’s actually what’s happening in Canada: They have lots of generalists and few specialists. 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 over $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why?
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