Section+Exercise+6+solns-1 - DepartmentofEconomics 2011

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Department of Economics               Spring  2011 University of California, Berkeley         Economics 1    Head GSI: Swetha  Doraiswamy Section Exercise 6 1) 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. Draw a diagram showing the effect of policy. Did the policy act as a price ceiling or price  floor? Was there a surplus or a shortage in the market? Price    S        P C       P 1 *    D        Q DC    Q 1 *   Q SC Quantity Since the price is set above the market price, this policy acts as a price floor . The policy  artificially raises the price above the equilibrium price, P 1 *, to P C  (the controlled price).  As a result, at P C , the quantity of bread supplied exceeds the quantity demanded. Too much  bread is produced, and there is a surplus in the market. One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread  and therefore an increase in the equilibrium market price. New York Bakers found that the 
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This note was uploaded on 04/26/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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Section+Exercise+6+solns-1 - DepartmentofEconomics 2011

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