Problem_Set_5_Answers

Problem_Set_5_Answers - 111 Answers to Problems on Applying...

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Answers to Problems on Applying Supply and Demand to Regulated Markets. Answer to Problem 5.1. A ceiling price is a (choose from “maximum” or “minimum”) price at which a trade may legally be made. Answer. Maximum. Answer to Problem 5.2. A floor price is a (choose from “maximum” or “minimum”) price at which a trade may legally be made. Answer. Minimum. Answer to Problem 5.3. Before market reforms in Russia, citizens spent a lot of time lining up to buy items in stores. The prices of these items were controlled and determined by the Russian Government. (i) What does the existence of all of these lines tell you about the controlled prices of these goods compared to the prices that would have existed in the absence of price controls? Were these prices market-clearing prices, ceiling prices, or floor prices? Answer. Lines form when there is an excess quantity demanded for a commodity so the controlled prices must have been lower than the market-clearing prices; i.e. the prices were ceiling prices. (ii) Can you think of recent events in the US where people have lined up to buy items because of imposed price controls? Answer. In recent US history the most significant such event occurred in the mid- 1970s when, against the advice of most economists, President Nixon imposed a ceiling price on gasoline (and ceiling prices on lots of other commodities also). Lines of cars formed at gas stations, waiting to fill up. In some cases the lines were miles long and often motorists who had waited in line for hours reached the front of the line only to discover that the station’s holding tanks had run dry. Similarly, we see lines form quite often for items such as concert tickets. In each such case the price asked for the commodity is lower that the price that would equalize total quantity demanded and total quantity supplied. Answer to Problem 5.4. From time-to-time in the US we see prices made subject to regulations that do not permit prices to rise above a governmentally specified level. Let us think through the consequence of such price controls. As an example we will use the market for gasoline. Particularly, suppose that the market demand curve and the market supply curve for gasoline are Q D = 100 - 20 p thousands of gallons and Q S = 30 p thousands of gallons, where p is the price per gallon of gasoline. (i) Draw a clearly labeled diagram showing the market demand curve and the market supply curve. Where on the vertical axis does the market demand curve start and where on the horizontal axis does it end? Where does the market supply curve start on the vertical axis? Answer.
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This note was uploaded on 03/01/2011 for the course ECO 182 taught by Professor Morgan during the Spring '08 term at SUNY Buffalo.

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Problem_Set_5_Answers - 111 Answers to Problems on Applying...

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