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ECON205 - Homework03 - S09

ECON205 - Homework03 - S09 - 1 Price controls Basic...

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1. Price controls - Basic concepts Which of the following statements best describes the concept of price ceiling? Assume that the equilibrium price of milk is \$3 per gallon . ./ @ The local government prohibits grocery stores from selling milk for more than \$2 per gallon. o There is a shortage (excess demand) of milk at the equilibrium price. o There are many teenagers who would like to work at grocery stores, but they are not hired due to minimum-wage laws. o The local government has instituted a legal minimum price of \$2 per gallon for milk. Explanation: Close A A price ceiling is a legal maximum on the price at which a good can be sold. This is quite different from a price floor, which is a legal minimum on the price at which a good can be sold. A minimum-wage law is an example of a price floor, whereas a law that prohibits grocery stores from selling milk for more than \$2 per gallon is an example of a price ceiling. t c U 0 1,1 Scores: .:. Average: 1/1

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2. Pricecontrols inthe Floridaorange market The calculator below depicts the market for Florida oranges, which are sold in units of gO-pound boxes. Supply is represented by the orange line and demand is represented by the blue line. Usethe calculator to help you answer the following questions. You will not be graded on any changes you make to the calculator. Tool tip: Useyour mouse to drag the horizontal green line on the graph. The values in the boxes on the right side of the calculator will change accordingly. You also can directly change the values in the boxes with the white background by clicking in the box and typing. The graph and any related values will change accordingly. PRICE (Dollars per box) 24 21 18 15 12 Price (Dol,ars p<:>rbox; Quantity Demanded (Millions of boxes per year-j 4 1167 Quantity Supplied .Mill ons of boxes per veer 367 9 6 3 , I I , I I o 200 400 600 800 1000 1200 QUANTITY lMillions of boxes per year] I Reset to Initial Values I I Calculate In this market, the equilibrium price is 500 million ./ boxes per year. Explanation: \$12 .t per box, and the equilibrium quantity of oranges is Close A The equilibrium price and quantity of oranges occurs at the intersection of the two curves, where the quantity demanded equals the quantity supplied. By dragging the horizontal green line in the calculator, one can see that this occurs at a price of \$12 per box and a quantity of 500 million boxes per year. A congressman from New York, facing pressure from constituents alarmed at increases in the price of orange juice, introduces a bill to set a price ceiling of \$9 per box of oranges. If the market price arbitrarily starts at the price ceiling of 59 per box, the quantity of oranges demanded will be 750 million./ boxes per year, while the quantity of oranges supplied will be 450 million ./ boxes per year. Therefore, there will be a shortage (excess demand) ./ of 300 million ./ boxes of oranges in this market per year. In the absence of any price controls, this will exert upward./ pressure on orange prices until the market achieves equilibrium.
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