Question

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 the policy. Did the policy act as a price ceiling or a price floor?

b. What kinds of inefficiencies were likely to have arisen when the controlled price of bread was above the market price? Explain in detail.

One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread and therefore an increase in its market price. New York bakers found that the controlled price of bread in New York was below the market price.

c. Draw a diagram showing the effect of the price control on the market for bread during this one - year period. Did the policy act as a price ceiling or a price floor?

d. What kinds of inefficiencies do you think occurred during this period? Explain in detail.

Answer 1