Government says that no one can buy or sell corn for

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Unformatted text preview: that they can’t make a decent living at $3 a bushel. In response, government imposes a price floor of $4 on corn. Government says that no one can buy or sell corn for less than $4 a bushel. The intended effect of the price floor is to help farmers. The unintended effect, though, is to hurt the buyers of corn (they have to pay a higher price). Also, the price floor leads to a surplus of corn. Defining Terms 1. Define: a. shortage b. surplus c. equilibrium (in a market) d. equilibrium quantity e. equilibrium price f. inventory g. price ceiling h. price floor Reviewing Facts and Concepts 2. If demand increases and supply is constant, what happens to equilibrium price? Price Controls and the Amount of Exchange Price controls (price ceilings and price floors) bring about less exchange (less trade) than would exist without them. In Figure 6-5(a) the equilibrium quantity traded was 80, but the price ceiling reduced this level to 60. In Figure 6-5(b) the equilibrium quantity traded was 80, but the price floor reduced it to 65. With this relationship in mind, let’s go back to something that you learned about voluntary exchange (or trade) in Chapter 2 and Chapter 3. In those chapters, you learned that exchange is something that makes people better off. If John exchanges his $15 for Yvonne’s book, John is, through his actions, saying that he is better off with the book than the $15. At the same time Yvonne is saying that she is better off with the $15 than she is with the book. In other words, exchange is something that makes both parties (the buyer and the seller) better off. If price controls decrease the amount of exchange that occurs, we must conclude that price controls limit the opportunities people have to make themselves better off. 3. If supply decreases and demand is constant, what happens to equilibrium price? 4. If supply increases and demand is constant, what happens to equilibrium price? 5. If the shortage is 40 units and the quantity supplied is 533 units, then what...
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This document was uploaded on 01/16/2014.

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