Topic 4: Price Control

Question 1

what is a price ceiling, who does it help, and where is the line

Answer 1

1. legal maximum on price of good
   o Helps consumers (as price too high to purchase)
   o Line BELOW equilibrium

Question 2

what is a price floor, who does it help, and where is the line

Answer 2

1. legal minimum on price of good
   o Helps producers (as price was so low= could not make profit)
   o Line ABOVE Equilibrium

Question 3

what are the two possible outcomes of a price ceiling

Answer 3

1. Placed below equil. price
   o BINDING
   o QD > QS = Shortage
2. Placed above equil. price
   o NON BINDING
   o No effect (as naturally doesn’t go above equil. price)

Question 4

what letters are involved in price control graphs

Answer 4

A B C D E (F only in ceiling)

C + E = DWL

Question 5

What are two possible outcomes of a price floor

Answer 5

1. Price above equilibrium
   o BINDING
   o QD < QS (surplus)
2. Price below equilibrium
   o NON BINDING
   o No effect (as price doesn’t fall beyond equil.

Question 6

why does a shortage develop for ceilings

Answer 6

• Price ceiling imposed > shortage develops (QD > QS)

o Consumers want more at low price, firms unwilling to supply more due to price

Question 7

why does a surplus develop in floors

Answer 7

o As high price // firms willing to make more, consumers willing to buy less)