week4

Question 1

Price ceiling graph

Answer 1

• Quantity demanded increase
• Quantity supplied decrease
• Shortage/Excess demand
• Units between Q1 and Q* are NOT produced
• Reduction in production causes a welfare loss because they have MV>MC

Question 2

Consequences of a price ceiling

Answer 2

• Creates a shortage
• Other consumers would be willing to pay more for the good
• Creates a profit opportunity by reselling the good at the market price

Question 3

Side effects of price ceilings:

Answer 3

• Inefficiently low quantity
• Inefficiently low quality
• Inefficient allocation to customers
• Wasted resources