110_11s_SelectedQ_Ch06

110_11s_SelectedQ_Ch06 - Econ 110 Selected Questions From...

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1 Econ 110 Selected Questions From Chapter 6 - GOVERNMENT ACTIONS IN MARKETS 1. Figure 6.1 illustrates the market for rental housing in Townsville. a. What are the equilibrium rent and equilibrium quantity of rental housing? The equilibrium rent is $450 a month and the equilibrium quantity is 20,000 housing units. If a rent ceiling is set at $600 a month, what is b. The quantity of housing rented? The quantity of housing rented is equal to 20,000 units. If the rent ceiling is set at $600 per month, it is above the equilibrium rent and so is ineffective. The rent stays at $450 per month and the quantity rented remains at 20,000 housing units. c. The shortage of housing? There is no shortage of housing units. Because the rent ceiling is ineffective, the market remains at its equilibrium so there is no shortage of housing units. If a rent ceiling is set at $300 a month, what is d. The quantity of housing rented? The quantity rented is 10,000 housing units. The quantity of housing rented is equal to the quantity supplied at the rent ceiling. e. The shortage of housing? The shortage of housing is 20,000 housing units. At the rent ceiling, the quantity of housing demanded is 30,000, but the quantity supplied is 10,000, so there is a shortage of 20,000 housing units. f. The maximum price that someone is willing to pay for the last unit of housing available? The maximum price that someone is willing to pay for the 10,000th unit available is $600 a month. The demand curve tells us the maximum price that someone is willing to pay for the 10,000th unit. 2. Capping Gasoline Prices The recent rise in gasoline prices has many people calling for price caps… price caps are a curse to consumers. … Capped prices … generate a distorted reflection of reality, causing buyers and suppliers to act in ways inconsistent with it … By masking reality, price controls only make matters worse. Pittsburgh Tribune-Review , September 12, 2005
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2 If a price ceiling is set below the equilibrium price in the market for gasoline, what are its effects on a. The quantity of gasoline supplied and demanded? If the price ceiling is set below the equilibrium price, the quantity of gasoline demanded increases and the quantity of gasoline supplied decreases. b. The quantity of gasoline sold and the shortage or surplus of gasoline? With the increase in the quantity demanded and the decrease in quantity supplied, a shortage of gasoline is created. The quantity of gasoline sold decreases from the equilibrium quantity before the price ceiling to equal the quantity supplied at the ceiling price. c. The maximum price that someone is willing to pay for the last gallon of gasoline available on a black market? The maximum price someone is willing to pay for the last gallon of gasoline available is determined by the height of the demand curve. The demand curve is upward sloping, so when the quantity of gasoline available decreases, the maximum price that someone is willing to pay for the last gallon available increases.
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This note was uploaded on 05/20/2011 for the course ECON 110 taught by Professor Po during the Spring '11 term at HKU.

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110_11s_SelectedQ_Ch06 - Econ 110 Selected Questions From...

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