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# sample_midterm2_S11_answersto4until9 - 4 President Chavez...

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4. President Chavez versus the Market: You can find this news article on pages 122&123 of the textbook. Based on the article, answer the following questions: a. What kind of price control (price floor / price ceiling) seems to have been implemented for powdered milk? We are told that producers can no longer make a profit selling powder milk, which means that prices are now lower. This means that a (binding) price ceiling was implemented in this market, below the equilibrium price. b. Describe the situation in the market for powdered milk before and after the price control. In the graph below, p* and q* denote the equilibrium price and quantity before the price ceiling. The price ceiling p’ is below p*. At p’, the quantity demanded exceeds the quantity supplied. In other words, there is an excess demand (shortage) of powdered milk in the market. c. Show consumer and producer surplus in the powdered milk market before and after the price control. Based on this graph, is the price control efficient? In graph 1 below, A and B denote consumer and producer surplus respectively before the price control. In graph 2 below, C and D denote consumer and producer surplus respectively after the price control. The area C+D is smaller than the area A+B, which means that total surplus falls with the price control. Since the price control does not maximize surplus, it is not efficient.

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Graph 1: Producer and consumer surplus before the price control Graph 2: Producer and consumer surplus after the price control Intuitively, at the price ceiling the quantity transacted is lower than the equilibrium quantity (q’ < q*). Recall that only the equilibrium quantity is efficient; any other quantity is not. In this particular case, a lower quantity means that there are many consumers who are willing to pay more than the cost of many producers, which means that many profitable trades are still possible – yet are not realized because of the price control.
5. A current concern of the federal government is unemployment. Another is securing decent wages for low-income workers. To accomplish the latter, many advocate the need to increase the federal minimum wage (for the purpose of this question, assume all states have the same minimum wage – equal to the federal minimum wage).Would raising the minimum wage address the unemployment problem? Use a graph to illustrate your answer.

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