Chapter 8

Question 1

Price ceilings

Answer 1

highest legal price (problem if below equilibrium)

Outcomes: quantity demanded exceeds quantity supplied -> consumers would be willing to pay 80$ for something sold for $40, suppliers only receiving $40 so they won’t make more unless they get a profit

Question 2

Rent control

Answer 2

Rent control: Price ceiling on rental housing

• Landlords didn’t want to rent out units with low profit so there was a shortage
• SF placed rent control only on low-income housing-> lead to houses having additions to make them high income

Question 3

Rent subsidies

Answer 3

Subsidies can lower rents without causing shortages

Question 4

Kidneys

Answer 4

• Kidneys have an extreme price ceiling at 0$ when they are valued at much higher
• Leads to very large shortage
• # of people on waiting list continues to grow every year because of shortages
• Iran allowed for kidney transplants to be paid for, eliminated waiting list

Question 5

Price floor

Answer 5

Lowest legal price (problem if above equilibrium)

Outcomes

• Surplus: gap between legal price of product and lowest price sellers would be willing to sell it for (surplus of of labor: unemployment)
• Lower quantity
• Black Markets (sellers charging customers way less than legal price bc doesn’t cost them that much to make)

Question 6

Minimum wage

Answer 6

Price floor on labor

• Quantity supplied of labor exceeds quantity demanded of labor
• Deadweight loss: employers would hire more workers if they could offer lower wages & workers would be willing to work for less
• Leads to unemployment
• Denmark raised minimum wage once teenagers hit 18
  
  • Employment decreased 33%
  • Hours worked decreased 45%

Wage subsidies can raise wages without reducing employment

Question 7

Price ceiling consequences

Answer 7

Black markets

Wasteful lines (willing to give up $40 worth of time to get unit)

Misallocation of resources: consumers with highest incentives are prevented from paying more to get more of the product i.e. prices no longer send signals to move resources from low value uses to high-value uses (e.g. oil in the winter on the east coast vs California)

Loss of gains from trade:

Reductions in product quality: bc sellers have more customers than goods, service also declines bc sellers have more customers than they want

Bribery:

Question 8

4. Price ceilings are usually enacted…

Answer 8

When policymakers believe that the equilibrium price is too high– want to make everything “more affordable” for the masses

Question 9

Price ceiling vs price floors

Answer 9

Price ceiling is maximum legal price

Price floor is minimum legal price