Question

Consider the information in the table below for a typical market. Use the information from the table to answer the questions (a) through (i) below.

Price	Quantity Demanded	Quantity Supplied
0	21	0
1	18	4
2	15	8
3	12	12
4	9	16
5	6	20
6	3	24
7	0	28

a. If the government set a price ceiling at $2, would there be a shortage or surplus, and how large would be the shortage/surplus?

b. If the government set a price ceiling at $4, would there be a shortage or surplus, and how large would be the shortage/surplus?

c. If the government set a price floor at $4, would there be a shortage or surplus, and how large would be the shortage/surplus?

d. If the government set a price floor at $2, would there be a shortage or surplus, and how large would be the shortage/surplus?

e. In this market, over what range of prices would a price ceiling set by the government be binding?

f. In this market, over what range of prices would a price floor set by the government be binding?

g. Why would policymakers choose to impose a price ceiling or price floor in this market?

h. Assuming, the government want to enact rent control laws. But since this policy might bring some inefficiency in the market, proposed a policy that the government can use to help renters other than the rental ceiling.

i. Assuming, the government want to enact minimum wage laws. But since this policy might bring some inefficiency in the market like can bring about unemployment to teens and unskilled workers, proposed a policy that the government can use to help workers other than the minimum wage law.

Answer 1

a) At price of $2, quantity demanded is greater than quantity supplied. So, there is shortage of goods in the market.

Shortage = Qd - Qs = 15 - 8 = 7 units

b) Price ceiling is effective when price is set below equilibrium price. Equilibrium price is $ 3 when price ceiling is set above $ 3 then it becomes ineffective.

c) At price of $ 4, quantity supplied is greater than quantity demanded so there is surplus of good in the market.

Surplus = Qs - Qd = 16 - 9 = 7 units

d) At price of $ 2, price floor is ineffective because price floor is effective till it is set above market equilibrium price.

e) Price ceiling is binding till price is set below equilibrium market price i.e price set between 0 and 3 is binding.

f) Price floor is binding till price is set above equilibrium market price i.e. price set above $ 3. Range varies between $ 3 to $ 7.