Question

1.7a. Suppose the government sets the maximum legal price at which a good may be sold in a particular market and assume that this price is less than the free-market equilibrium price. Draw a diagram exhibiting the actual price and quantity that comes to exist in this market. Be sure to identify the latter quantity and price in your diagram and explain why this quantity and price become, respectively, the actual equilibrium (not the free-market equilibrium) quantity and price in the market.

b. Draw the same kind of diagram for the case in which the government sets the minimum legal price at which a good may be sold and this price is more than the freemarket equilibrium price.

1.8. Why is elasticity used as a measure of the responsiveness of quantity changes to price changes rather than (reciprocal) slope?

1.9. What does the size of the coefficient of elasticity imply about a. the relationship between changes in price or quantity and changes in total revenue along the demand curve? b. the sign of marginal revenue along the demand curve?

Please cover all 5 cases of elasticity in your answer.

Answer 1

A.Since maximum price is less the market price, the government has imposed price ceiling. It has resulted in excess demand since quantity demanded is greater than quantity supplied.This price may become the actual price only because it is imposed by the government

B.Government has imposed price floor because the minimum price charged is greater than the market price.It has resulted in deficit demand because quantity supplied excess quantity demanded.