Question

1. Suppose the equilibrium price of gasoline is $3 per gallon.

a. Using the demand and supply graph, draw this equilibrium in the space below. Make this graph large, it will be used for future questions.

b. Now suppose the government imposes a binding price ceiling on this market. Identify a value for this price ceiling that would be binding and show it on the graph. Graphically show whether excess demand or excess supply would result.

c. With the price ceilings, will consumers buy more or less gas? Identify the quantity that consumers will buy on the graph above.

d. On your graph above, identify the area that would represent the remaining consumer and producer surplus with the price ceiling in effect.

e. What forms of non-price competition might we expect to see in this market? Give some examples and explain WHY these would happen. You can take a look at https://www.theatlantic.com/national/archive/2012/05/what-america-looked-like-the-1970s-gas-crisis/257837/ for some hints.

2. Suppose the equilibrium price of gasoline is $3 per gallon.

a. Using the demand and supply graph, draw this equilibrium in the space below. Make this graph large, it will be used for future questions.

b. Now suppose the government imposes a binding price floor on this market. Identify a value for this price floor that would be binding and show it on the graph. Graphically show whether excess demand or excess supply would result.

c. With the price floors, will consumers buy more or less gas? Identify the quantity that consumers will buy on the graph above.

d. On your graph above, identify the area that would represent the remaining consumer and producer surplus with the price floor in effect.

e. What forms of non-price competition might we expect to see in this market? Give some examples and explain WHY these would happen.

3. Suppose the price of milk is $2 a carton. In each of the cases below, fill in the blank.

a. Suppose the government passes a price ceiling, “It is illegal to charge more than 1.50 per carton.” The result will be quantity demanded ________ quantity supplied (choose less than, greater than, or equal to).

b. Suppose the government passes a price ceiling, “It is illegal to charge more than 3.50 per carton.” The result will be quantity demanded ________ quantity supplied (choose less than, greater than, or equal to).

c. Suppose the government passes a price floor, “It is illegal to charge less than 1.50 per carton.” The result will be quantity demanded ________ quantity supplied (choose less than, greater than, or equal to).

d. Suppose the government passes a price floor, “It is illegal to charge less than 3.50 per carton.” The result will be quantity demanded ________ quantity supplied (choose less than, greater than, or equal to).

Answer 1